The Reserve Bank of Australia (RBA) has lowered its cash rate by 25 basis points, bringing it down to 3.60%. During their recent meeting, the board suggested that more rate cuts may be necessary in the coming year due to current economic conditions. While the policy is still somewhat restrictive, future decisions on rate cuts will depend on new data and evaluations of global risks. The board discussed whether to ease rates gradually or make faster cuts. They noted that the job market is tight, inflation is above the target midpoint, and domestic demand is improving. Concerns about excess capacity and the neutral rate indicated a need for gradual easing, while a balanced job market could push for quicker easing to avoid falling inflation. They emphasized that data will guide their decisions.

Economic Indicators and Forecasts

Recent forecasts align with goals for employment and inflation. House prices are rising at normal rates, and home building is on the rise. There are some risks from U.S. tariff policies, but extreme scenarios appear to be avoided. The board chose not to speed up the reduction of government bond holdings and will continue with the current approach. After a previous rally, the AUD/USD fell due to updates on U.S. policies. The RBA stressed that future decisions will depend on data, especially focusing on inflation and employment. Following the RBA’s 25 basis point cut to 3.60%, we can expect further easing in the months to come. The board’s clear indication that more cuts are likely shows a shift towards more relaxed monetary policy. Traders should prepare for lower interest rates, possibly by using short-term interest rate futures. Since data will be closely monitored, volatility may increase around significant releases, particularly the Consumer Price Index (CPI) and employment reports. In July 2025, we saw a slight increase in the monthly CPI to 3.8%, while unemployment rose to 4.2%. This mixed data presents challenges for the RBA. Therefore, using options may be a wise trading strategy to navigate potential price fluctuations following these announcements.

Trading Strategies and Market Dynamics

For currency traders, the AUD/USD is influenced by two conflicting factors. The RBA’s dovish approach is putting pressure on the Australian dollar, while political issues in the U.S., such as the recent firing of a Fed Governor, are weakening the U.S. dollar. This combination suggests a stable trading range until one of these forces becomes stronger. Lower interest rates usually support equities, creating a favorable environment for the ASX 200. Since the RBA highlighted recovering domestic demand, these cuts seem to be more proactive rather than reactive to economic downturns. This could lead traders to adopt bullish strategies using index futures. The board’s acceptance of rising house prices supports further rate cuts, as it reduces potential barriers to easing policy. A similar trend occurred during the 2019 easing cycle, where initial cuts boosted the property market without alarming the RBA. This historical context suggests that housing will not deter the bank from its current approach. Continuing the gradual reduction of government bond holdings, instead of accelerating it, signals a cautious approach. It indicates that the RBA is not aiming to tighten financial conditions through its balance sheet, helping to avoid potential challenges for both bond and equity markets in the upcoming weeks. Create your live VT Markets account and start trading now.

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