This week our currency strategists focused on the RBA Monetary Policy Statement (May 2025) for potential high-quality setups in the Aussie.

Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical conditions triggered to become a potential candidate for a trade & risk management overlay.

Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.

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Check out our review on that discussion to see what happened!

AUD/JPY: Monday – May 19, 2025

On Monday, our strategists had their sights set on the RBA monetary policy statement and its potential impact on the Australian dollar.

Based on our Event Guide, expectations were for the RBA to cut its interest rates by 25 basis points from 4.10% to 3.85%, with markets showing roughly 51% expectation for a larger 50 basis point reduction. With those expectations in mind, here’s what we were thinking:

The “Aussie Advance” Scenario:

If the RBA delivered a hawkish hold or a “dovish cut with optimistic forward guidance,” we anticipated this could boost AUD despite easing policy. We focused on AUD/CHF for potential long strategies if risk sentiment was net positive, especially given SNB Chairman Schlegel’s comments about potential negative rates creating policy uncertainty for the franc. The improving global trade environment following the US-China tariff truce could also benefit risk-sensitive currencies like the Australian dollar.

In a risk-off environment, AUD/CAD long was our pair of choice given Canada’s rising unemployment at 6.9% and contracting Ivey PMI, indicating broader economic weakness compared to Australia’s robust job market with 89K jobs created versus 20.9K forecast.

The “Aussie Avalanche” Scenario:

If the RBA surprised with a larger 0.50% reduction or hinted at additional aggressive easing, we thought this could weigh on AUD. We considered GBP/AUD for potential long strategies in a risk-on environment, particularly given the pair’s double bottom pattern formation after failed attempts to move below the 2.0500 major psychological mark and stronger than expected U.K. GDP data.

If risk sentiment leaned negative, AUD/JPY shorts looked promising given escalating geopolitical tensions spurring safe-haven flows into yen, along with the pair’s recent ascending trend line break and Japan’s hawkish monetary policy backdrop.

What Actually Happened

The RBA cut rates by 25 basis points to 3.85% as expected, but the accompanying statement and economic projections struck a notably more dovish tone than markets anticipated. Key points from the statement and projections:

• GDP growth forecast was lowered to 2.1% for 2025 (from 2.4%) with unemployment expected to rise to 4.3%
• Underlying inflation projections were revised down to 2.6% (from 2.7%), closer to the midpoint of the target range
• The RBA outlined a “severe downside scenario” where trade war escalation could push unemployment to nearly 6%
• Governor Bullock emphasized during the press conference that the Board considered and debated a 50 basis point cut
• Global economic uncertainty, particularly US trade policy, was emphasized as a key risk to the outlook

Market Reaction

This outcome fundamentally triggered our AUD bearish scenarios, and with risk sentiment leaning cautious amid geopolitical tensions and US fiscal concerns, AUD/JPY became our focus.

Looking at the AUD/JPY chart, we saw immediate selling pressure after the RBA event, with the pair dropping sharply from around the pivot point level (93.85) & Fibs during the Asian session. The dovish tilt in the RBA’s projections and Governor Bullock’s comments about debating a 50bps cut likely amplified the bearish momentum.

The pair’s downward momentum was supported by multiple factors converging simultaneously. Japan’s core CPI jumping to 3.5% versus 3.4% expected, along with machinery orders surging 13% month-over-month, reinforced expectations for continued BOJ tightening. Additionally, formerly dovish BOJ official Noguchi’s support for gradual rate hikes likely provided further hawkish backing for the yen.

By the week’s end, AUD/JPY had even broken below the S1 pivot level (92.08) with the help of rising tariff tensions between the U.S. and European Union hitting the broad markets, prompting AUD/JPY to get as low as -1.80% from the RBA event before bouncing into the weekend.

The Verdict

So, how’d it play out?

Our fundamental analysis anticipated potential AUD weakness on a more dovish than expected RBA outcome, which played out as the central bank delivered not just easing but significantly downgraded economic projections. Our technical analysis correctly identified the 38% Fibonacci retracement area and weekly Pivot Point as a key area to watch fore reversal patterns as a potential bearish confirmation.

If traders entered short positions after the dovish RBA decision and projections, they could have captured a substantial move lower of over 150 pips from the event level to the week’s lows. The sustained downward momentum and clear technical levels likely meant that trade management would have been simple with likely very few adjustments needed. 

Overall, we think this discussion was “highly likely” supportive of a net positive outcome as both fundamental and technical triggers aligned perfectly. The RBA’s unexpectedly dovish projections provided the catalyst while Japan’s hawkish policy backdrop created the ideal environment for AUD/JPY shorts, with the pair trending lower throughout the entire week and closing well below the original discussion price levels.