ASX 200, SGX iron ore: Bullish breakouts on the menu, hawkish RBA a risk

• The RBA will deliver its May interest rate decision on Tuesday
• A hawkish hold is expected. What isn’t known is just how hawkish it will be.
• ASX 200 futures are capped below the 50DMA, a level it has respected for much of the past year
• Strength in SGX iron ore futures continue to support Australia’s giant iron ore miners

Tuesday looms as a make-or-break session for Australia’s ASX 200 with futures sitting at a key technical level ahead of the Reserve Bank of Australia (RBA) May interest rate decision. Should it provide a hawkish update as covered in a preview note earlier this week, it may hinder upside in the near-term. One saving grace for bulls may be the continued rebound in iron ore futures in Singapore. We’ll look at trade setups for both markets in this brief note.

Quick RBA overview

Tuesday’s RBA decision will be largely about what it signals on the future path of inflation. Having seen a couple of meetings under the new RBA format, it’s the statement and forecasts that typically move markets, not the post-meeting press conference held by Governor Michele Bullock. As such, if you’re trading AUD/USD or ASX 200 through a fundamental lens, that’s where your focus should be.

On the updated forecasts, it’s a near-certainty the bank’s near-term trimmed mean inflation forecasts will be revised higher to reflect the hotter-than-expected March quarter consumer price inflation report. The question is whether the detail in that and past inflation reports will be enough to see the forecast profile upgraded through to the middle of 2026, implying a slower return to the midpoint of the bank’s 2-3% inflation target and increased risk of it having to resume its tightening cycle.

While the updated forecasts will have a higher-for-longer cash rate profile than those issued in February, given its near-term unemployment forecasts are likely to be lowered and uncomfortable detail in the latest inflation report when it comes to domestic price pressures, it may be enough to offset the higher rates profile and see its 2025 trimmed mean inflation forecasts increased by a similar margin.

Net-net, if that is the case, it points to upside risks for AUD/USD and downside risks for the ASX 200.

ASX 200 futures capped below key level

Having broken long-running uptrend support three weeks ago, Australia’s ASX 200 futures have spent the period since attempting to form a bottom, continuing to find buying on dips below 7540. Since the Federal Reserve FOMC meeting last week, it’s been nothing but one-way traffic for SPI futures, seeing the price bounce to the 50-day moving average, a level it’s respected constantly dating back to the final quarter of 2023.

The proximity to the 50-day moving average provides a decent level to build a trade around, allowing for optionality depending on what the RBA does (and Asian markets) later in the session.

Should the bank deliver a hawkish hold as we expect and futures be unable to break connivingly through the 50-day moving average, it will allow for shorts to be established below the figure with a stop loss order above 7745 for protection.

Alternatively, should the RBA deliver an unlikely dovish surprise, or we see a big rally in regional equity markets, a clean break of 7745 may open the door to a push to 7800. If that eventuates, place a stop loss order under the 50-day moving average for protection. With indicators such as RSI and MACD turning higher, momentum is to the upside.

SGX iron ore may see further upside ahead

One factor that’s been working in the favour of ASX 200 bulls has been iron ore futures in Singapore have been flying, rebounding sharply after dipping below $100 per tonne on several occasions in March and April. Over recent weeks, the price has broken the 50-day moving average and downtrend resistance dating back to the start of 2024, leaving the price coiling up in an ascending triangle below the 200-day moving average.

If the 200 gives way – something that looks increasingly likely given the constructive price action – it may open the door to a push towards $123.80, $126.85 or $131.60. Should we get the topside break, don’t forget to place a stop loss below the 200-day and/or uptrend support for protection against reversal.

-- Written by David Scutt

Follow David on Twitter @scutty