The Australian labour market has shown remarkable resilience, posing a challenge for lower inflation rates. Despite the recent Consumer Price Index (CPI) report indicating that annual inflation is in line with expectations, the continuous growth in services inflation, which is being supported by a strong job market, makes it challenging for inflation to decrease. Moreover, annual wage growth in Australia is on an upward trajectory, further complicating the inflation outlook.
The economic path of Australia has diverged significantly from that of the United States. While the latest US inflation figures have shown a continual decline in core inflation, leading to expectations of a rate cut by the Federal Reserve in September 2024, the Australian journey is faced with numerous obstacles that might delay any significant monetary policy changes. The additional liquidity from federal tax cuts and power bill rebates is yet to fully impact the market, making it a waiting game for policymakers.
The upcoming Federal Open Market Committee (FOMC) Meeting Minutes scheduled for August 21 will be closely watched by investors. Discussions surrounding the labor market, the overall economy, and the future rate trajectory are expected to be crucial in determining market sentiment. Any heightened concerns regarding the labor market and economic outlook could raise expectations of a 50-basis point rate cut in September, followed by additional cuts in November and December, potentially bringing the Federal Funds Rate to 4.50%.
The possible rate cuts by the Federal Reserve could narrow the interest rate differential between the US and Australia to 15 basis points, which might support an upward movement in the AUD/USD exchange rate above $0.70. Federal Reserve Chair Jerome Powell’s comments on August 23 could provide further clarity on the likelihood of a September rate cut. The increased worries about the US labor market have raised the probability of a 50-basis point rate cut, altering market expectations.
Short-term trends in the AUD/USD exchange rate will largely depend on key economic indicators, including services sector Purchasing Managers’ Index (PMI) data, US jobless claims, and decisions made by the Federal Reserve. Weaker economic data from the US could bolster expectations of a 50-basis point rate cut in September, potentially pushing the AUD/USD towards $0.70.
In this dynamic environment, it is essential for investors to stay vigilant and remain attuned to developments in the labor markets of both Australia and the US, as well as the monetary policy decisions being made by their respective central banks. Real-time data, news updates, and expert analysis should guide trading strategies to adapt to changing market conditions effectively.
From a technical standpoint, the AUD/USD is currently trading above the 50-day and 200-day Exponential Moving Averages (EMAs), indicating a bullish trend. A potential breakout above $0.67500 could signal a challenge of the $0.67967 resistance level, with further upside towards $0.68996. However, a breach below the $0.67003 support level might introduce bearish sentiment, with a possible test of the 50-day EMA.
The Australian labour market’s resilience poses a unique challenge for policymakers in managing inflationary pressures. The diverging economic paths of Australia and the US, coupled with uncertainties surrounding future rate cuts, contribute to the complex environment faced by investors and traders. Staying informed, monitoring key economic indicators, and adapting trading strategies accordingly will be crucial in navigating these uncertain times.