Australian Dollar 2024-2025 Forecast: AUD/USD to Strengthen to 0.71 say MUFG

January 11, 2024 - Written by David Woodsmith

STORY LINK Australian Dollar 2024-2025 Forecast: AUD/USD to Strengthen to 0.71 say MUFG

The Pound to Australian dollar (GBP/AUD) exchange rate challenged 3-week highs at 1.9025 in immediate response to the latest inflation data, but there was a sharp retracement later in the session with GBP/AUD dipping to 1.8940 before settling around 1.8965.

The Australian dollar to US dollar (AUD/USD) exchange rate traded just above 0.6700.

The inflation data reinforced expectations that interest rates have peaked, but markets still expect that the Reserve Bank of Australia (RBA) will be one of the slowest global central banks to cut interest rates this year.

Overall risk conditions will also be important for the Australian currency. Speculation over further monetary easing by the Chinese central bank helped underpin the currency.

The latest monthly data recorded a decline in the Australian inflation rate to 4.3% for November from 4.9% the previous month. This was below consensus forecasts of 4.4% and the lowest rate since January 2022.

The decline in inflation was triggered by a decline in petrol prices and discounting surrounding Black Friday sales.

Core inflation declined sharply to 4.6% from 5.3% and close to the government forecast of 4.5% at the end of 2023.

Futures markets imply only a 2% chance of the RBA tightening policy further, while pricing in relatively modest 50 basis points of easing for all of 2024.

In contrast, markets expect cuts of over 100 basis points by the Fed, ECB and Bank of England.

The RBA will hold its next policy meeting in February.

IG Market analyst Tony Sycamore commented; "Today's fall in the trimmed mean and the core measure, below 5%, confirms that the disinflation narrative remains firmly in place and expectations of RBA rate cuts in 2024.”

Tapas Strickland, head of market economics at National Australia Bank (NAB), said the data challenges the bank’s view of another rate rise in February, but also expressed continuing reservations over sticky inflation.

He added; “But at the same time, it doesn’t give any credence to the prospect of rate cuts at least in the first half of this year, which is probably a bigger factor.”

Ben Jarman, chief economist and rate strategist at JPMorgan also noted that inflation was still above target and commented; “The details of the inflation report still leave plenty of room for debate between the ‘job done’ and ‘sticky’ camps.”

He added; “This data should keep the RBA wary of declaring victory early, and it is unlikely the RBA leadership will show much open-mindedness to easing soon.”

According to Commerzbank it increases the likelihood that interest rates have peaked.

Commerzbank added; “If the labor market remains strong next week, as it has been recently, a soft landing for the Australian economy looks increasingly likely.”

The bank expects choppy trading; “The mere fact that another rate hike by the RBA cannot be completely ruled out, unlike by other G10 central banks, makes for exciting (and likely volatile) days ahead for the Aussie.”

ANZ Bank expects a solid Australian dollar tone; “given our view that RBA rate cuts will only begin at the end of 2024, it is likely that the carry advantage that the AUD will have against currencies where interest rates have eased aggressively will matter.”

MUFG notes underlying yield support; “The Australian rate market expects the RBA to begin cutting rates during the second half of this year lagging behind other major central banks such as the Fed. Short-term yield spreads have been providing support for the Aussie in recent months.”

MUFG expects AUD/USD will strengthen to 0.71 at the end of 2024.

UK interest rate trends will also be important for the GBP/AUD rate.

ING expects hawkish near-term BoE rhetoric will continue, but added; “We remain of the view that a deterioration in economic conditions in the UK will ultimately warrant substantial BoE rate cuts.”

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TAGS: Australian Dollar Forecasts