The Reserve Bank of Australia (RBA) concluded its June meeting today, surprising market participants with its hawkish tone. Contrary to the expectations of most experts, the regulator once again raised the interest rate. The Australian dollar reacted accordingly, jumping against the US currency to the level of 0.6690 (the lower boundary of the Kumo cloud on the weekly chart).
Overall, the Aussie received a significant boost today, but traders of AUD/USD will only be able to fully capitalize on it after the June meeting of the Federal Reserve. Suppose the US regulator adopts a wait-and-see position (which is highly likely). In that case, buyers of the pair will be able to test not only the upper boundary of the Kumo cloud (0.6750) but also potentially reach the 68-69 figure range in the medium term. What matters is that the Reserve Bank of Australia raised the interest rate once again and allowed for further steps in that direction in the future.
First and foremost, it is necessary to note that the RBA is going against the grain of expert opinion for the second time in a row. Before the May meeting, most analysts also predicted a status quo, which significantly strengthened the Australian dollar when the central bank unexpectedly raised the rate by 25 basis points. Ahead of the June meeting, the expert community once again believed that the RBA would keep the rate unchanged. Most economists (22 out of 30) surveyed by Reuters agency predicted that on June 6, the central bank would maintain the rate at 3.85%. The remaining eight economists indicated a likely rate hike of 25 basis points. Interest rate futures are priced with approximately a one-in-three chance of a rate increase.
However, the Reserve Bank once again expressed concerns about inflation. Moreover, these concerns were well-founded. In monthly terms, the consumer price index for April (published just a few days before the meeting) rose to 6.8% against the forecasted decrease of 6.2%. The CPI slowed in annual and quarterly terms but remained in the "green zone," as experts expected a more significant decline.
In other words, there were certain prerequisites for implementing the hawkish scenario. Still, the market, for the most part, was confident that the RBA would pause in June due to weak labor market growth data (the unemployment rate increased, and employment decreased by 4,000, contrary to the forecasted increase of nearly 30,000).
In the accompanying statement of the June meeting, the RBA indicated that inflation in Australia had passed its peak, but the upside risks to the inflation forecast had increased. Therefore, the central bank had to react to this fact. Furthermore, the regulator may require "some further" tightening of the monetary policy: raising the interest rate should provide "greater confidence that inflation will return to the target level in a reasonable timeframe." According to central bank officials, further prospects for tightening monetary policy will depend on the development of the economy and inflation.
This suggests that if the upcoming inflation reports in Australia indicate a return to the "green zone," the RBA will again raise the interest rate, this time to 4.35%.
Conclusions
The unexpected decision of the Reserve Bank of Australia to raise the rate, as well as the hawkish stance of the RBA, supported the Australian currency. However, the northward momentum quickly faded: buyers of AUD/USD could not make a blitzkrieg and enter.