UBS Group stated that due to a series of inflation surprises, the Reserve Bank of Australia may raise interest rates in August, which could benefit the Australian dollar (AUDUSD) in the long term.
Australia's Consumer Price Index (CPI) has exceeded expectations for three consecutive months, increasing market expectations that the RBA will need to take more actions to curb inflation. In May, the CPI rose to 4%, significantly higher than the RBA's annual target of 2% to 3%.
UBS Group forecasts that if the second quarter's CPI rises by at least 1% quarter-on-quarter, the RBA will raise the official cash rate by 25 basis points to 4.6%.
In addition to the CPI data, UBS Group believes that robust retail sales and labor data could also prompt the RBA to hike rates.
"The key question is whether these data points are enough to prompt the RBA to raise rates again," UBS analysts wrote in a report. They also predicted that the RBA's plans to cut rates would be postponed to April 2025, rather than the previously expected February 2025.
As a result, UBS Group predicts a positive trend for the Australian dollar in the long term, particularly for the AUDUSD pair. UBS expects this pair to reach $0.68 in December and $0.70 by June 2025.
However, they also caution that the Australian dollar still faces some downside risks, around its current level of $0.66. They also recommend holding long positions in the Australian dollar against the New Zealand dollar and expect the AUDNZD pair to reach 1.15 NZD within the next 12 months.
