ASX 200 index analysis ahead of RBA interest rate decision

The ASX 200 index remained on edge on Monday as analysts and investors waited for the second Reserve Bank of Australia (RBA) decision of the year. It was trading at A$7,850, its lowest level since August 12, and  9.08% below its highest level this year. 

RBA interest rate decision

The ASX 200 index which tracks the biggest companies in Australia, retreated as the RBA started its two-day meeting. 

Most analysts expect the bank to leave interest rates unchanged as it remains concerned about inflation. 

However, some analysts, especially those from the WSJ, recommended that the bank should cut rates, arguing that it was running out of options as risks rose. 

These analysts noted that inflation was decreasing and doing better than most countries. The headline Consumer Price Index (CPI) dropped to 2.4% in the fourth quarter from 2.8% in the previous one. That decline was lower than the median estimate of 2.5%. It signaled that inflation was moving in the right direction since it peaked at 7.8% in 2022. 

Analysts caution that a rate cut will be necessary to boost economic growth in the country as the world waits for Donald Trump’s Liberation Day on Wednesday. He is expected to announce reciprocal tariffs on top trading partners, including Australia.

On the positive side, Australia may be spared from these tariffs because trade favors the US. The US exported goods worth $34.6 billion to Australia in 2024 and imported $16.7 billion. That left it with a trade surplus of over $17 billion. 

Still, a prolonged trade war will likely impact Australia, a country that does a lot of business on China. 

Australian stocks have lost momentum

The fear of a trade war explains why Australian stocks have lost momentum this year, with the ASX 200 index falling by almost 9% from its highest level this year. 

Its decline on Monday mirrored that of other top global indices. For example, the Dow Jones futures dropped by 0.5% or 220 points, while those linked to the S&P 500 fell by 50 points. 

Other global indices retreated, with the Hang Seng index falling by 1.40%, and the Shanghai falling by 1%. In South Korea, the KOSPI plunged by 2.7% as Trump’s tariffs will impact the country. The country sells thousands of cars and chips to the US annually.

Still, the ASX 200 index will likely be less affected by these tariffs because of its composition, where banks are the biggest constituents. Banks are usually less affected when there is a trade war. 

Commonealth Bank (CBA), the biggest ASX 200 company, has dropped by just 2.4% this year and is up by 24% in the last 12 months. Westpac shares have dropped by 3%, while National Australia Bank (NAB) has retreated by over 8%. 

These Australian banks have retreated mostly because of profit-taking since most of them jumped by double digits in 2024.

ASX 200 index technical analysis

ASX 200 index chart | Source: TradingView

The daily chart shows that the ASX 200 index has pulled back in the past few weeks. It retreated from a high of A$8,690 earlier this year to the current A$7,855. 

The index has moved below the lower side of the ascending channel. It has moved below the 50-day moving average. Similarly, the Relative Strength Index (RSI) has dropped and moved below the zero line. The two lines of the MACD indicator has moved below zero.

Therefore, the ASX 200 index will likely continue falling as sellers target the next key support at A$7,500. 

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