Australian Dollar rebounds as sellers take a breather, dovish RBA bets might limit the gains

Aussie finds some relief after mixed Australian PPI figures.
Traders are keeping vigilance on job data disappointment from the US.
Markets adjust their stance on the Reserve Bank of Australia's monetary policy and now expect a cut in 2024.

Patricio Martín FXStreet

The Australian Dollar shows a minor recovery against the US Dollar (USD), which is experiencing a sharp drop after disappointing US jobs data. That being said, economic frailties in Australia and increasing rate cut expectations for the Reserve Bank of Australia (RBA) provide a limited upside for the Aussie.

Despite high inflation, weaknesses in Australian economic activity have caused markets to amend their expectations from a rate hike to a rate cut from the RBA by the end of the year. Predictions now propose that the RBA will introduce a cut to tackle economic sluggishness, which could potentially limit further escalation for the Aussie.

Daily digest market movers: Aussie gains ground despite increased RBA cut odds

Australia's Q2 Producer Price Index (PPI) unveiled this week displayed an increase of 4.8% YoY, a substantial leap from Q1's 4.3%.
This continued acceleration, hitting its highest point since Q1 of 2023, places the RBA under scrutiny to respond accordingly.
With the market attributing an 80% chance of an RBA cut by year-end, the Aussie’s upside is limited.
Across the Pacific, US Nonfarm Payrolls increased by 114K, far less than the predicted 175K.
The Unemployment Rate climbed to 4.3% as compared to June's 4.1%, and the Labor Force Participation Rate noted a marginal increase to 62.7% from the previous 62.6%.
The Average Hourly Earnings report showed a drop from 3.8% to 3.6% YoY, which has affected the currency market adversely by adding weight to USD.
In light of this data, the Federal Reserve (Fed) is expected to initiate interest rate reduction measures starting in September, with a 90% chance priced in according to the CME FedWatch Tool.

AUD/USD Technical Analysis: Bearish tendencies challenged, still room for potential corrections

The AUD/USD trading beneath the 20, 100 and 200-day Simple Moving Average (SMA) prolongs predominantly bearish sentiment. The daily Relative Strength Index (RSI) saw values between 30 and 37 during the past week, reinforcing the bearish perspective. The Moving Average Convergence Divergence (MACD) maintains flat red bars, signaling enduring bearish momentum.

However, the AUD/USD pair seems to exhibit resilience near the 0.6480 mark, indicating a potential key support level. Conversely, resistance is speculated to be around the 0.6560-0.6570 zone, where selling pressure has so far capped the rally.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element in assessing 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 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 because low labor supply and high demand leads to higher wages.

Why is wage growth important?

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.

How much do central banks care about employment?

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 their significance as a gauge of the health of the economy and their direct relationship to inflation.

Author

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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