Can the RBA's rate decision give the Australian dollar a fresh boost?

The Australian dollar could receive a welcome boost if the RBA delivers a favourable decision tomorrow. With a rate hike already widely priced in by the markets, the question is whether RBA Governor Bullock can provide additional support for the AUD/USD exchange rate.

Traders are currently assigning around an 87% probability to a 25 basis point hike tomorrow, which would bring the cash rate to 4.85%. The expected move would follow the September hike, as inflation continues to pose a stubborn challenge for policymakers.

Looking further ahead, the market is barely pricing in any further tightening beyond the one anticipated tomorrow. In fact, traders see only around 33 basis points of tightening by June 2027, a figure that includes the expected move this week.

Essentially, this signals a final hike from the Reserve Bank. Given this backdrop, could the central bank catch traders off guard ahead of tomorrow?

It can be argued that it is not outside the realms of possibility, as the central bank will want to retain as much flexibility as possible, just like other major central banks these days. In a more hawkish scenario, the 25 bps hike would be accompanied by stronger warnings on inflation and a clear signal that further tightening remains firmly on the table.

If Bullock explicitly pushes back against an expected extended pause, traders could be forced to rethink the rate path. If so, this would be the ideal recipe for another leg higher in the Australian dollar.

For this to happen, three things must fall into place. First, the RBA must signal that inflation remains a key concern. Merely acknowledging that inflation pressures are stubborn will not be enough.

Second, Bullock must challenge the view that tomorrow's rate hike might be the last. Finally, the central bank must sound hawkish enough to shift the expected rate path.

These are not necessarily the hardest hurdles to clear, but clearing all of them remains a challenge.

In the neutral scenario, the RBA simply delivers the expected rate hike and keeps its options open. Bullock would reiterate the data-dependent nature of policy without offering much encouragement for further tightening. This can be seen as the most likely outcome, as she seems unwilling to pre-commit at this juncture.

Meanwhile, a more dovish scenario is the one that could make things most uncomfortable for the Australian dollar. A surprise hold would be the most obvious shock to the market. However, even a rate hike paired with softer inflation projections or hints that policy is sufficiently restrictive could weigh on AUD/USD.

These are the three main scenarios to consider as the decision tomorrow approaches.

The question is no longer so much whether the RBA will raise the cash rate tomorrow. In all likelihood, it will deliver as expected. Instead, traders should be asking whether Bullock can convince the market that the tightening cycle has another chapter to go. That is where the real surprise opportunity lies for AUD/USD traders.