This week, the Reserve Bank of Australia maintained a hawkish policy stance, despite cutting interest rates for the first time in four years to 4.1% on Tuesday. In an interview, Vice President Andrew Hauser reiterated Block's cautious stance, implying that there is still uncertainty about further interest rate cuts.

The market has made adjustments to this signal. Previously, investors expected that there may be four interest rate cuts in 2025, but currently only one interest rate cut has been fully accounted for, and the probability of a second interest rate cut has been lowered to about 70%. As a result, the Australian dollar has become one of the top ten major currencies in the world in terms of performance.

The Reserve Bank of Australia adjusts interest rate pace to avoid falling behind the global easing cycle

Block stated at Friday's parliamentary hearing that part of the reason for this week's interest rate cut is that policymakers do not want to act slowly as the world enters a loose cycle.

It can be said that in the early stages of the interest rate hike cycle, our response was not quick enough to respond to rising inflation in a timely manner. I believe the board of directors remains highly concerned about this, "she said." If we want to start cutting interest rates, we need to make decisions when inflation is close to the target range, rather than waiting until it fully returns to the target range before taking action

Inflation data and the job market are key influencing factors

The focus of market attention will shift to the January inflation data to be released next Wednesday, and it is expected that the indicator may slightly rebound to 2.7%. If the data is lower than expected, investors may further bet on the timing of the Reserve Bank of Australia's interest rate cut in advance. At present, the market expects the next interest rate cut to occur as early as May.

If the inflation data in January meets expectations, the possibility of a rate cut in May will significantly increase, "said Sean Keane, Chief Strategist for JB Drax Honore Asia Pacific." The Reserve Bank of Australia may have to cut rates again, otherwise it may face market disappointment and lead to a tightening financial environment

Before the interest rate decision meeting on April 1st, the Reserve Bank of Australia needs to evaluate retail sales, fourth quarter GDP, February employment data, and another inflation report to further assess the economic trend.

The tightening of the job market affects the inflation path

As consumer price pressures gradually ease, the Reserve Bank of Australia is shifting more attention to the job market to assess its potential impact on inflation. The latest data shows that the number of new jobs added in January far exceeded market expectations, indicating that the labor market remains strong.

Block emphasized at the hearing that the remaining idle capacity in the labor market remains a key uncertain factor. The answer to this question will have a significant impact on the future path of inflation

Future interest rate policy depends on data performance

According to the latest forecast from the Reserve Bank of Australia, the core inflation rate is expected to drop to 2.7% by mid-2025 and remain at that level until mid-2027. And in the fourth quarter of last year, the core CPI remained at 3.2%, higher than the Federal Reserve's target range of 2-3%.

Block explained that the forecast is based on market expectations of three interest rate cuts, but if interest rates remain unchanged, inflation may actually fall below the midpoint target of 2.5%. Therefore, the Reserve Bank of Australia needs to be extra cautious when adjusting policies and rely on the latest data.

Looking back at the past three years, we can be satisfied with the current progress, but our task is far from complete, "Block said." We will not commit to any specific interest rate path in advance

The Australian dollar is driven by policy expectations in the short term, but there are still variables in the medium to long term

In the short term, the trend of the Australian dollar is mainly influenced by the following factors:

1. Adjustment of market expectations for interest rate cuts: Due to the lack of a clear statement from the Reserve Bank of Australia regarding further interest rate cuts, the market has reduced its interest rate bets, which has reduced the depreciation pressure on the Australian dollar.

2. Global economic environment: If major central banks such as the Federal Reserve begin to cut interest rates and the Reserve Bank of Australia remains cautious, the Australian dollar may continue to receive support.

3. Key economic data: Inflation, employment, and GDP data in the coming months will directly affect the decisions of the Reserve Bank of Australia and indirectly impact the trend of the Australian dollar.

However, in the medium to long term, the Australian dollar still faces certain uncertainties:

If inflation slows down faster than expected, the Reserve Bank of Australia may accelerate the pace of interest rate cuts, thereby suppressing the Australian dollar.

2. Global commodity price changes: As a resource-based currency, the Australian dollar is closely related to the prices of commodities such as iron ore and coal. If demand slows down, the Australian dollar may come under pressure.

3. International trade concerns: The uncertainty of the external economic environment may affect Australia's exports, thereby affecting the trend of the Australian dollar.

In summary, the Australian dollar may remain strong in the short term, but its medium to long term direction still depends on the monetary policy path of the Reserve Bank of Australia and changes in the global economic environment. Investors need to pay attention to the upcoming inflation data and job market dynamics to determine whether the Australian dollar can maintain its current upward trend.