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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

AU Jobs preview and what comes next for the AUD/USD?

The AUD/USD trades firms ahead of the release of key labour market data, identified by the RBA as a source of inflation concerns.

AUD Source: Bloomberg

At its Board Meeting last week, the Reserve Bank of Australia (RBA) surprised the market by raising its official cash rate by 25 basis point (bp) to 4.10%.

The RBA chose to look past softer data in May and focus on elevated inflation.

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range.”

Concerns around wages and productivity were noted in the statement that accompanied the RBA’s decision and highlighted again in a speech by RBA Governor Lowe the following day.

“There is a close relationship between inflation and the rate of growth in unit labour costs. Over the entire inflation targeting period, the cumulative increase in the consumer price index (CPI) has closely matched that in unit labour costs…”.

Behind rising labour cost inflation – higher wages and poor labour market productivity. Drilling down, a cause of low productivity (amongst other factors), is Australia's extremely low unemployment rate.

A low unemployment rate means less skilled workers have entered the labour force. It also means that some workers don’t work as hard as previously, given the tight labour market and a lack of alternatives to replace them.

Given the RBA’s focus on inflation, wages and productivity, tomorrow’s labour market will be closely watched.

What is "expected?"

Last month (April), employment fell by 4.3K, missing forecasts for a rise of 25K. The slight fall in employment followed an average monthly increase of around 39,000 people during the first quarter of 2023. As the number of unemployed people increased by 18K, the unemployment rate unexpectedly rose to 3.7% from 3.5% in March.

This month (May), the market is looking for a +17.5k rise in employment and for the unemployment rate to remain stable at 3.7%. The participation rate is expected to remain unchanged at 66.7%, just below record highs.

What would constitute a surprise?

The market will seek evidence that the RBA's aggressive interest rate hiking cycle is taking some heat out of a red-hot labour market. Aware that another robust jobs report would increase the likelihood that the RBA raises the cash rate at its next meeting in July by 25bp to 4.35%.

Currently, the interest rate market is pricing in a 25% chance that the RBA will raise rates by 25bp in July, with a full rate hike priced by September.

Should the unemployment rate print at 3.6% or lower, it would increase the chances and bring forward the timing of future RBA rate hikes. This would be a positive for the AUD/USD.

Conversely, should the unemployment rate print at 3.8% or higher, it would likely see the rates market marginally reduce the chance of future rate hikes. This would be a negative for the AUD/USD.

AUD/USD Technicals

The AUD/USD is trading higher today at .6780 following the People's Bank of China' (PBoC) rate cut yesterday, which is expected to be part of a new stimulus package.

The AUD/USD is also being supported by the expectation of future RBA rate hikes while the Federal Reserve (Fed) approaches the end of its tightening cycle. Finally, last week, a 6.5% rally in the iron ore price supported the local unit.

Over the past sixteen weeks, the .6810/20 resistance area has capped the AUD/USD. If the AUD/USD can see a sustained break above .6820/30, post the Federal Open Market Committee (FOMC) and AU jobs data, it would put .7000c and then the year-to-date February .7157 high on the market’s radar.

Aware that while the AUD/USD stays below resistance at .6810/20, further sideways range trading is likely.

AUD/USD chart Source: TradingView
AUD/USD chart Source: TradingView

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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