Mitsubishi UFG Says Australia's Central Bank Is Set to Act as Australian Dollar Sentiment Improves

06:48 AM EDT, 08/11/2025 (MT Newswires) -- One of the key macro events this week will be the Reserve Bank of Australia's policy decision at 12:30 a.m. ET on Tuesday, said MUFG.

The OIS market is indicating a 100% probability of a 25bps cut and as such, the potential for a market move is unlikely to come from the RBA confirming this and cutting as expected, wrote the bank in a note to clients.

The reasoning behind the markets' conviction of a cut this weak is understandable, stated MUFG. The Q2 inflation data saw the underlying measures of the consumer price index - - the trimmed mean and weighted median both falling to 2.7%, not far from the mid-point of the RBA's inflation target range of 2.0%-3.0%.

The jobs market, which has been one of the factors that has allowed the RBA to remain cautious, showed clearer weakness in July also, pointed out MUFG. The full-time employment reading fell 38,200 in June and the unemployment rate drifted up from 4.1% to 4.3%, the highest level since November 2021.

The OIS market is priced now for the RBA actively cutting through the remainder of this year and into Q1, with the policy rate reaching an implied terminal rate close to 3.00% by March 2026. That implies two additional rate cuts from the RBA following this week's likely cut.

That suggests market participants will be expecting signals from Governor Michele Bullock that there remains scope for further easing ahead, added MUFG. The justification for holding off from cutting in July, to the surprise of markets, was the need to assess further inflation data.

With the Q2 data favorable, the communication from the RBA should reveal greater confidence in achieving its goal, which could be interpreted as the RBA being open to further cuts ahead, according to the bank. No doubt the RBA will emphasize the need for lowering rates in a "sensible, cautious way."

The RBA may be somewhat more confident about the international environment, although the decision will be on the same day that investors possibly get clarification on the status of the trade deal between the United States and China, noted the bank. A 90-day extension in the trade truce looks more likely, which should be supportive for AUD/USD.

What is clear from the positioning data over the last month or so is that Leveraged Funds have turned more favorable toward the Australian dollar (AUD) and have been reducing short positions. Indeed, shorts were significant at the start of the year when President Donald Trump was inaugurated, but global trade fears have eased and this has helped provide AUD support.

A rate cut this week and a repeat cautious guidance are unlikely to result in much AUD depreciation, said MUFG. The outcome of the U.S.-China trade relationship will probably prove more important.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.