AUD/USD Slides in Spite of Strong Australian Employment Data

AUD/USD Analysis

The pair posted its best day of the year on Tuesday, boosted by the soft US CPI report, which showed core inflation rising at the slowest pace in two years (4% y/y), reinforcing optimism for peak Fed rates and sending the greenback lower. This come shortly after the Australian central bank hiked rates to 12-year highs, after staying on the sidelines for four consecutive meetings.

Australian policymakers acted because inflation is "proving more persistent than expected a few months ago" and raised their forecasts, projecting it to drop "at the top" of the 2-3% target range by the end of 2025 (from 2.75% previously). High Pay growth does not help restore price stability and according to Wednesday's data the Wage Price Index rose 1.3% q/q in the third quarter, the biggest increase in the twenty six years of the series and 4% y/y, marking the fastest pace since 2009. The results were likely boosted by the minimum wage increase that applied from July 1. ^[1]

Today's employment report meanwhile was rather robust, pointing to still tight labour conditions, despite some easing. The Australian economy added 55,000 jobs in October and the unemployment rate ticked up to 3.7% but remains close to the five-decade lows (3.4%).

Despite the strong labor data, AUD/USD slides today and markets appear to think that they are not enough to compel policymakers to new action. Earnings hit new highs, but risk of a wage-price spiral appears low and the RBA views them as "still consistent with the inflation target". The central bank had not shut the door to further tightening, but had actually softened its rhetoric around future moves.

AUD/USD broke fresh ground after the US CPI boost and this gives it the chance to tackle the 0.6570-84 hurdle and look to 0.6659. However, we remain cautious around its ascending prospects, given its reaction to the employment data, faltering once again at the 0.6500 handle. This creates risk for a return below the EMA200 (at around 0.6400), although 0.6269 appears distant at this stage.