Tips and Tricks for the RBA’s Interest Rate Decision

Last Friday we saw Uncle Sam’s NFP report live up to its volatility-inducing rep. If you’re still hungry for pips though, then you’re in luck! It’s the start of another round of central bank decisions, yo!

The RBA is up first. How can we make pips from its decision tomorrow at 4:30 am GMT?

Why should I trade this anyway?

Good question, my young padawan. Forex traders tend to listen to central banks like the Reserve Bank of Australia (RBA), mostly because they’re the big bosses of interest rates and local money supply.

Hints of easy policies usually mean that the economy is in trouble, at least enough to need some boosting (yikes!) or lower interest rates (double yikes!). Meanwhile, hints of hawkish policies could mean higher interests for holding local currencies (yay!) and that the economy is in good enough shape to reduce government stimulus (double yay!).

What happened last month?

The RBA proved that it meant business by surprisingly slashing its interest rates from 2.00% to a record low of 1.75%. Glenn Stevens and his gang cited low consumer prices as the reason for the cut, going as far as cutting their inflation estimates for 2016. Yikes!

The subdued labor costs, low global inflation pressures, China’s moderating growth, and a not-so-overheated housing market gave the RBA the excuse to further its cause against Australia’s low consumer prices. Not surprisingly, the Aussie dropped across the board at the news.

What are market players expecting this time?

After last month’s rate cut, the RBA is widely expected to keep its rates steady at 1.75% in June. Analysts point out that, low inflation and wage growth aside, the economy is actually doing pretty well. In fact, the central bank isn’t expected to make any changes until after the July 2 election and the Q2 2016 inflation numbers are out.

That doesn’t mean that the RBA won’t be making headlines though. If you’ve read the Australian economy snapshot, then you’ll know that much of the economy’s growth still depends on mining, consumption, and exports. With a weak wage growth weighing on inflation and less mining activities putting more pressure on Australia’s non-mining-related goods, the RBA can easily give some dovish remarks tomorrow and even jawbone the Aussie a bit.

How might AUD/USD react?

Looking at the past two RBA decisions, we can break down AUD/USD’s price action into three observations:

AUD/USD's reaction to the RBA's decision: May 2016

AUD/USD’s reaction to the RBA’s decision: April 2016

AUD/USD's reaction to the RBA's decision: April 2016

AUD/USD’s reaction to the RBA’s decision: May 2016

1. Buy the rumor, sell the news
AUD/USD tends to trend in one direction from the start of the day up until the hour of the RBA’s decision. In both cases, the event candle cancelled out all of the early Asian session gains/losses. Are AUD/USD traders just into buying the rumor and selling the news?

2. AUD/USD always reacts to the event.
I’ve looked as far back as the last FOUR interest rate events and saw that AUD/USD always reacts to the news whether the RBA made changes or not. The candles can be as short as 25 pips or as long as 150 pips. One possible explanation is that forex traders who have “priced in” the event usually take profits right at the actual release.

3. The RBA-related moves stop at the start of the London session.
Any significant change in the RBA’s biases will likely impact the Aussie’s long-term outlook but, on an intraday basis, the party usually stops where the London session begins.

See, AUD/USD tends to make its retracements or reversals in the next three hours after the release and then eventually trade on the whims of the London and U.S. session’s risk environment. That means you have to wrap up your news trade before the London session starts!

There you have it, folks! I hope this guide will help you lock in pips tomorrow. Don’t hesitate to share your game plan for the event!


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