The RBA as expected cut rates by 25 basis points to 2.5%, a record low. From the RBA: "The Board has previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand. At today's meeting, and taking account of recent information on prices and activity, the Board judged that a further decline in the cash rate was appropriate. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time."A Weak Economy Forced Further Action RBA policy makers have been looking at some pretty rough data from the economy including faltering retail sales (0.0% in June, 0.2% in May, -0.1% in Apr, -0.4% in Mar) which shows that consumers remain cautious despite previous rate cuts. The Services PMI continues to be mired in contractionary territory, with July posting a 39.4 reading, the lowest since March 2009. Meanwhile the Manufacturing PMI, after a surprising increase to 49.6 in June (from 43.8 in May) fell back into the doldrums, with a 42.0 reading in July, driving home the point that something is amiss down under. Not to mention that the unemployment rate has crept up to 5.7%, the highest since November 2009. Weak consumers, poor business activity from services and manufacturing, and a rising unemployment rate all gave ample reason for the RBA to cut rates another 25 basis points to 2.5%.Warning Signs Ahead for the RBA At the same time, there are some signs that the RBA has to be wary about. For one, the TDMI Inflation Gauge rose 0.5% m/m in July which put the annual change at 2.7%, up from 2.4% in June. That is close to the upper range of the RBA's inflation target. Second, the RBA has concerns that the housing sector has facets of a price bubble. Quarterly data from the ABS added some ammunition to that argument as it showed that its 2nd quarter quarterly House Price Index nearly doubled forecasts by rising 2.4%. What's Next for the AUD/USD? The AUD/USD slid sharply last week as market participants priced in another RBA rate cut. The pair fell from 0.93 down to 0.8850 during the week, a 450 pips move from top to bottom, ending what had been a 5-week range. The question now is whether the we see further weakness, or if the RBA's message will give some support to the AUD/USD amid a scaling back of any further rate cuts? The RSI in the 4-hour traded below in oversold territory throughout most of the week, and the start of this week showed some attempt to find a short term bottom. However, any upside moves will likely be shallow and important resistance can be seen both in the fib levels from last weeks down-swing, the important 0.9040 old support turned to resistance area, as well as all the EMA's which are currently showing a bearish lean. Therefore, while the counter-trend play might seem ripe for some, the conventional strategy would be to go with the flow and give consideration to fading any short-term rallies. If there is another plunge in the pair the medium term target would be 0.8550 as that level is a 50% retrace of the full upswing in this pair from the lows in late 2007 to the highs in mid 2010, as well as a pivot from February 2010. - Nick