No clear trigger for RBA’s rate cut on Tuesday

The Reserve bank of Australia (RBA) meets on August 2 to decide policy and expectations narrowly favour a 25 basis points rate cut to a new record low of 1.5 percent. Australia's GDP is growing solidly, while non-mining activity continues to pick up. The labour market also remains in good shape. Q2 inflation will be a key input into the August rate cut decision. Risks around the AUD will factor into the decision.

In its May policy statement, RBA forecast underlying inflation to be between 1 and 2 percent in 2016 and then within 1.5 and 2.5 percent by June 2018. June data was "slightly above the RBA's forecast for underlying inflation, but the weighted median measure of inflation was below the central bank's forecast.

In the June quarter, Australia's consumer price index increased 0.4 percent after a quarterly decline of 0.2 percent in March. On-year, the inflation rate decelerated to 1 percent, compared to the 1.3 percent rise in the twelve months to the March quarter of 2016.

In view of recently mixed data we feel the RBA can wait a little longer until a clear picture emerges. The RBA is likely to underline that a further rate cut remains likely and hence AUD gains are likely to be limited.

"While the RBA in the recent July Board meeting Minutes noted that the economy was looking a little more mixed (employment, credit), overall, GDP is on track to reach at least 3 percent this year and next.  A lack of a GDP outlook downgrade—combined with a likely unchanged inflation profile—is unlikely to sway the Board members to cut next week," said analysts at TD Securities.