AUD/USD rebounds as softer US jobs data and Warsh comments ease Fed rate-hike fears

Softer Fed outlook helps drive AUD/USD recovery

AUD/USD finished higher last week at 0.6940, posting a respectable 0.67% gain after dipping to a three-month low of 0.6863 earlier in the week.

The Aussie’s recovery kicked off on Tuesday after the release of hawkish Reserve Bank of Australia (RBA) meeting minutes, which was quickly followed that evening by Federal Reserve (Fed) Chair Kevin Warsh’s comments at the European Central Bank (ECB) Forum in Sintra, Portugal. Warsh noted that inflation risks and expectations had eased in recent weeks, striking a less hawkish tone than at the June Federal Open Market Committee (FOMC) meeting.

Those remarks were then reinforced by Thursday’s cooler-than-expected non-farm payrolls report, which showed United States (US) job growth slowing sharply to just +57,000 in June – well below the 115,000 consensus and accompanied by notable downward revisions to prior months. While the unemployment rate held at 4.2%, the softer headline figure was influenced by a drop in the participation rate from 61.8% to 61.5%. A falling participation rate is typically viewed as a cautionary signal, often reflecting discouraged workers leaving the labour force.

The combination of these developments helped ease near-term Fed rate-hike concerns, taking some steam out of the recent US dollar rally, which had pushed the greenback to a 13-month high at the end of June.

In turn, the softer US dollar tone triggered a rebound in commodity prices, with gold, silver and copper all finding support. As we have noted previously, commodity prices tend to move inversely with the US dollar – a firmer greenback makes resources more expensive for foreign buyers, and vice versa. The easing in Fed rate-hike expectations also saw the yield spread in the AUD’s favour widen marginally, providing additional support.

Markets await ISM services PMI and FOMC minutes

Looking ahead, with a relatively light domestic data calendar this week, the fortunes of AUD/USD are likely to be dictated by tonight’s Institute for Supply Management (ISM) services purchasing managers' index (PMI), Thursday morning’s FOMC minutes, and broader risk sentiment, which is likely to be somewhat cautious ahead of the start of the second-quarter (Q2) earnings season next week.

AUD/USD technical analysis 

The head-and-shoulders topping pattern we highlighted in early June worked out well, with AUD/USD reaching the head-and-shoulders top projection at 0.6875 before testing and holding an important band of support ahead of the March 0.6831 low.

Looking ahead, provided AUD/USD continues to hold above the band of support in the 0.6860 – 0.6830 area – which includes last week’s low at 0.6863, the March low at 0.6831, and the 200-day moving average, currently near 0.6868 – there is scope for the pair to extend its recovery, initially back towards the 0.7000 handle.