Australian Dollar finds a hard time resuming its upwards path and continues consolidating
- AUD/USD slightly declined on Thursday, below 0.6730.
- Newly released employment data sets the direction for possible RBA and Federal Reserve decisions.
- However, monetary divergences between both banks remain steady.
The Australian Dollar (AUD) suffered losses against the USD during Thursday's session, falling below 0.6730. The AUD slightly faltered due to investor responses to both Australian and US labor market data that has provided further clues for the next Reserve Bank of Australia (RBA) and Federal Reserve decisions.
Despite the underperforming Australian economy, stubbornly high inflation pressures the RBA to defer rate cuts potentially limiting the AUD's downside. The RBA is anticipated to be among the final central banks within the G10 countries to introduce rate cuts, a factor that promises to sustain the AUD's momentum.
Daily digest market movers: Australian labor market data guides the AUD course.
- The Australian Bureau of Statistics (ABS) revealed an impressive 50.2K increase in employment changes, surmounting the earlier market forecasts of 20K and May's 39.5K record.
- On the negative side, the Unemployment Rate escalated slightly from 4.0% to 4.1%, and although minor, it might ease the RBA’s hawkish stance.
- On the US front, labor data indicates applicants for unemployment insurance benefits rose by 243K in the week ending on July 13.
- These figures exceeded initial forecasts and previous weekly records according to Thursday's report from the US Department of Labor.
- Currently, projections predict nearly a 50% chance of the RBA taking a rate hike, possibly in September or November.
- The potential rate cut by the Federal Reserve in September, however, seems a close deal and divergent approaches by the Fed and RBA towards their respective monetary policies could curb the losses of the pair.
Technical Analysis: AUD/USD continues flat, overall outlook stays positive.
Despite the losses in the week, the future of AUD/USD remains generally positive as the pair maintains levels not experienced since the beginning of the year. After the early July gains, indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have shown weakening trends, implying the pair has entered a correction period. For the next sessions, the pair might side-ways trade in the 0.6700-0.6800 channel as buyers book profits.
Employment FAQs
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.
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 their significance as a gauge of the health of the economy and their direct relationship to inflation.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
