ASX 200 index analysis after the RBA interest rate pause

The ASX 200 index rebound continued on Tuesday after the latest interest rate decision by the Reserve Bank of Australia (RBA). The index, which tracks the biggest Australian companies, rose to a high of $7,351, higher than last week’s low of $7,087.

RBA and Fed outlooks

The S&P/ASX 200 index drifted upwards as investors reacted to the latest RBA decision. In his final meeting, Governor Philip Lowe decided to leave interest rates unchanged at 4.10%, as I predicted here. It was the third straight meeting in which the bank has left rates intact.

This rate decision came at an important time for the Australian economy. There are signs that it is slowing dramatically as the cost of living remains at an elevated level. On the positive side, data published last week revealed that the headline and core inflation dropped again in July.

Australian companies, including those in the ASX 200 are facing headwinds. The biggest challenge is that China is slowing at a faster pace than expected. Data published on Tuesday revealed that the Caixin services PMI dropped to 51.8 in August.

Business activity in China is important for Australian companies like Rio Tinto, BHP, and Fortescue Mining since they do a lot of business in the country. Therefore, by pausing its interest rate hikes, the RBA hopes to engineer a soft landing for the Australian economy.

The ASX 200 index is also reacting to the rising odds that the Federal Reserve will also pause in its September meeting. This view was confirmed by last week’s US economic data. The data revealed that the country’s consumer confidence retreated to 106 in August while the unemployment rate rose to 3.8%. 

Actions by the Fed play an important role in Australian stocks because of how interconnected the financial market is.

Most ASX 200 constituents were in the green after the RBA decision while banks dropped. Westpac Bank shares dropped to A$21.47 while ANZ Group stock retreated to A$25. Commonwealth Bank and NAB shares were in a tight range.

ASX 200 forecast

The daily chart shows that the ASX 200 index has been in a recovery mode in the past few days. This recovery started after the index dropped to A$7,087, the lower side of the ascending channel shown in green.

The index has also moved slightly above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved to 60. Therefore, there is a likelihood that the index will continue rising as buyers target the key resistance level at A$7,502, the highest point on July 27th.