The Reserve Bank of Australia (RBA) is in the spotlight today with the release of its quarterly ‘Bulletin’. This document includes articles about the economy, policy, and other important topics. A significant event is RBA Governor Bullock’s speech on “The RBA’s Dual Mandate – Inflation and Employment” at the Anika Foundation in Sydney. This is scheduled for 0305 GMT on Thursday, July 24, or 2305 US Eastern time on Wednesday, July 23.

Expecting a Rate Cut

The RBA’s next meeting is on August 11-12, and a 25 basis points rate cut is widely expected. We think Bullock’s speech is the most important event before the policy meeting in August. Financial markets are leaning towards a rate cut, so her comments on inflation and employment will be closely analyzed for clues. Traders should prepare for possible market fluctuations, as her words will shape future expectations. If she highlights recent weaknesses in the labor market, it will strengthen the case for lowering rates. Australia’s unemployment rate has recently risen to 4.1%, giving her clear grounds to suggest a possible rate cut. This could lower yields on short-term government bonds and reinforce expectations for August. On the other hand, if she draws attention to persistent price pressures, it could catch traders off guard. Australia’s latest quarterly CPI inflation reading was 3.6%, which is above the RBA’s target range of 2-3%. If her tone leans towards being hawkish and emphasizes these pressures, it could lead to a swift retreat from rate-cut positions.

Market Expectations and Strategies

Current market data shows that traders have priced in about a 70% chance of a 25-basis-point cut in August. This indicates that while the market is generally leaning towards a dovish outlook, there is still some uncertainty, allowing for a potential major shift. Bullock’s speech could either push this probability to 100% or send it back below 50%. In the past, the market has been caught off guard by the central bank, especially in late 2023 when anticipated rate cuts didn’t materialize due to stubborn inflation. This serves as a reminder that expected policy changes are not always guaranteed, and we should approach the current consensus with caution. To navigate this uncertainty, we see value in using options to trade potential price swings. Buying straddles on the Australian dollar or short-term interest rate futures would allow traders to benefit from significant market moves, regardless of the direction. This strategy effectively trades on the outcome of the speech itself. Create your live VT Markets account and start trading now.

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