AUD/JPY falls to near 96.00 as RBA rate cut expectations weigh

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AUD/JPY halts its four-day winning streak, trading around 96.00 during the European hours on Monday. The currency cross depreciates as the Australian Dollar (AUD) faces challenges due to market caution ahead of the interest rate decision by the Reserve Bank of Australia due on Tuesday.

AUD/JPY depreciates as traders expect the RBA to deliver a 25 basis point rate cut on Tuesday.
The RBA is widely expected to cut interest rates after core inflation eased to 2.7% in June.
Traders remain uncertain regarding the Bank of Japan's interest rate hikes.

Traders are pricing in that the Reserve Bank of Australia (RBA) will deliver a 25 basis point (bps) interest rate cut, bringing its Official Cash Rate (OCR) to 3.6% from 3.85% at its August meeting. The RBA is widely anticipated to reduce interest rates as core inflation eased to 2.7% in June, well within the RBA’s 2–3% target, along with rising unemployment and slowing wage growth.

However, the Australian central bank adopted a cautious stance in July, pointing to a more balanced view of inflation risks and ongoing labor market strength. Governor Michele Bullock stated following the July decision that the central bank would no longer offer forward guidance, stressing that decisions lie solely with the board and cannot be predicted before meetings.

Additionally, the AUD/JPY cross depreciates as the Japanese Yen (JPY) receives support, while mixed sentiment surrounds the Bank of Japan's (BoJ) interest rate hikes. The BoJ Minutes for the July meeting indicated that board members continue to maintain their view that further interest rate increases remain appropriate, despite heightened uncertainty surrounding tariffs.

However, BoJ's Summary of Opinions suggests that policymakers remain uncertain about the potential negative impact of higher US tariffs on the domestic economy, tempering expectations for an immediate rate hike.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.