AUD/USD extends losses, approaches 0.6500 with US data on tap
- The Aussie Dollar gives away Wednesday's gains in cautious markets ahead of key US data releases.
- Higher-than-expected trade surplus figures in Australia have failed to support the Aussie.
- The ADP Employment report is likely to strenghten the case for Fed cuts in September
The Australian Dollar is retracing its previous gains against the US Dollar on Thursday. A cautious market mood ahead of key US services activity and employment data releases is weighing on the Aussie, which has depreciated about 0.4% so far today.
The pair was capped right above 0.6560 on Wednesday before retreating to levels near the 0.6500 round level at the moment of writing. The upbeat Australian Trade Balance data, which showed a larger-than-expected surplus in July, has failed to provide significant support to the AUD.
The USD picks up ahead of US data releases
Investors are reluctant to sell US Dollars, awaiting the release of US ADP Employment Change figures, for further clues about the labour market’s momentum. The market consensus anticipates a mild increase in employment, which is likely to increase concerns triggered by the weak Job Opening report seen on Wednesday.
Later on the day, the ISM Services PMI report is expected to show a significant improvement in the sector’s activity in August, which might calm fears about the downside risks to the economy.
The primary focus, however, remains on Friday’s key Nonfarm Payrolls report, due on Friday, which will be analysed with interest to confirm investors’ hopes that the conditions are set for a widely expected Fed rate cut in September.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
