The ASX 200 index retreated on Tuesday after the Reserve Bank of Australia (RBA) delivered its first interest rate cut of the cycle. The index, which tracks the biggest companies in Australia, crashed to the key psychological point at A$8,500, down by 1.60% from its highest level this year. So, what next for the S&P/ASX 200 index?
RBA slashes interest rates
The main catalyst for the ASX 200 index was the decision by the RBA to cut interest rates by 0.25% to 4,1%. This was a notable cut since the bank had resisted slashing rates last year as most central banks were expecting.
In a statement, the RBA noted that inflation had dropped substantially from its peak in 2022 and that geopolitical risks remained. The underlying inflation has moved to 3.2%, down from over 8% in 2022. As such, officials believe that inflation is moving in the right direction and that it will sustainably remain between the 2% and 3% target range.
Economists expect that the RBA will continue cutting interest rates in the coming meetings since the economy is slowing. It will also cut rates to adjust to the new policies by Donald Trump, especially on tariffs. In its statement, the RBA said:
“The board will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labor market. It remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
The Australian dollar held steady after the RBA decision, with the AUD/USD exchange rate rising to 0.6350, its highest level since December last year. It has jumped by over 4.2% from its lowest point this year.
Australian bond yields have risen slightly in the past few days. The ten-year yield rose to 4.46%, up from this month’s low of 4.30%. Similarly, the 30-year yield rose to 5%, while the five-year moved to 3.90%.
Australian bank stocks react to the RBA statement
Most ASX 200 companies reacted mildly to the RBA interest rate decision. Most Australian banks retreated as the rate cut means that they will have a weaker net interest margin. Westpac’s share price crashed by over 2.6%, while ANZ Holdings fell by 0.40%.
The National Australia Bank (NAB) fell by 1.58%, while the Commonwealth Bank of Australia (CBA) fell by 1.2%. All these banks have benefited substantially in the past few months as interest rates have remained high. They will, nonetheless, do well since interest rates are expected to remain higher for longer.
The top laggards in the ASX index were companies like Challenger, Mineral Resources, Pilbara Minerals, and Whitehaven Coal.
On the other hand, the top gainers in the ASX 200 index were firms like Hub24, ARB Corporation, Zip, A2 Milk, and Mesoblast.
ASX 200 index analysis
The daily chart shows that the ASX 200 index has been in an uptrend in the past few months. It has formed an ascending channel that connects the highest swings since December 2023 and the lowest point since January 2024.
The index has remained above the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bulls are in control. It
However, the ASX 200 index has formed a small rising wedge pattern. Also, the two lines of the MACD indicator are about to form a bearish crossover, while the Relative Strength Index (RSI) has tilted downwards.
Therefore, the S&P/ASX 200 index will likely retreat and retest the key support at A$8,250. A move above the upper side of the channel at $8,690 will invalidate the bullish view and point to further gains ahead.
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