AUD/USD falters amid dovish RBA and spike in US inflation

A promising start to last week ended in disappointment for the AUD/USD, which reversed lower following a more dovish than expected RBA meeting.

Further curtailing the AUD/USD’s upside ambitions last week was a higher-than-expected inflation reading within the University of Michigan Sentiment data on Friday night, which saw US yields and the USD rally into the weekend. Reports that US President Joe Biden will quadruple tariffs on Chinese EVs, and other targeted industries have resulted in the AUD/USD falling below .6600c in the opening session of a new week. Whether it will stay there will depend on a giddy mix of homegrown and offshore macro events.

From an offshore perspective, Wednesday night's US CPI reading looms large. A lower-than-expected inflation reading is expected to support the AUD/USD and vice versa. From a local perspective, the key drivers will be Wednesday's wages data, followed by Thursday's labour force report. Tuesday night federal budget is not traditionally a market mover. However, we outline here why this time could be different.

What is expected from this week’s Australian labour force report

Date: Thursday, 16 May at 11.30am AEST

In March, the Australian economy lost 6.6k jobs, versus consensus expectations of +7.2k and following a 117.6k rise the prior month. The unemployment rate ticked up to 3.8%, from 3.7% prior. The participation rate ticked up to 66.6% from 66.7%. Meanwhile, the underutilisation rate, which combines the unemployment and underemployment rates, was flat at 10.3%, above its post-pandemic low of 9.5%. The ABS noted, "The labour market remained relatively tight in March, with an employment-to-population ratio and participation rate still close to their record highs in November 2023. While they have both fallen by 0.4 percentage points since then, they continue to be much higher than their pre-pandemic levels," Mr Jarvis said.

In April, the market expects the economy to add 25k jobs and the unemployment rate to rise to 3.9% against an unchanged participation rate of 66.6%. The rates market is pricing in a 25% probability of a rate rise before year-end. The odds of an RBA rate hike before year-end could rise further pending next week's labour force report and the outcome of Tuesday's Federal Budget, with some estimating that the budget will add the equivalent of three rate cuts into the pockets of households.

AU unemployment rate chart

AUD/USD technical analysis

On the weekly chart, the AUD/USD continues to move sideways within a contracting multi-month bearish triangle. Downtrend resistance from the January 2023 .7158 high is currently at .6760ish. Uptrend support from the October 2022 .6170 low is at .6340ish.

AUD/USD weekly chart

To end a prolonged period of jagged range trading and to increase the chances that the AUD/USD based at the April 19 .6362 low, a sustained break above resistance .6650/70ish is needed. In this case, a test of weekly downtrend resistance at .6750/60 would come into focus. On the downside, the AUD/USD has initial support from the 200-day moving average at .6520ish and below that, a layer of support at .6480ish from swing lows in March and April, reinforced by the February .6442 low.

AUD/USD daily chart

• ^{Source: Tradingview. The figures stated are as of 13 May 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}