Blockbuster labour force data offset by cautious risk appetite
AUD/USD finished slightly lower last week at 0.6979 (-0.01%), consolidating after three consecutive weeks of gains. This came as the United States (US) dollar found support from more cautious global risk appetite, which offset a bumper domestic labour force report for June.
The labour force report showed Australian employment surged by 76,800 in June – smashing the consensus forecast of a 15,000 gain. The unemployment rate held steady at 4.4%, as the participation rate climbed a healthy 0.3 percentage points to 67.0%. The strong June print followed a significant rebound in jobs in May and reinforced the Reserve Bank of Australia’s (RBA) assessment that labour market conditions remain ‘a bit tight’.
Middle East de-escalation lifts risk sentiment
Over the weekend, the first concrete signs of de-escalation emerged in the Middle East since the rise in tensions earlier this month. After 13 consecutive nights of US strikes, there was a notable absence of further action, while Iran announced a pause in its retaliatory strikes.
The combination of these events has taken some of the heat out of oil prices, with crude falling as much as 8% at one stage this morning, while Nasdaq futures jumped around 450 points (1.6%), before trimming gains. The improvement in risk sentiment has seen AUD/USD trading higher this afternoon at 0.6998 (+0.20%).
Looking ahead, the Aussie will continue to be driven by a familiar mix of local and offshore forces. Offshore, the drivers will be a heavy US earnings calendar – including Microsoft, Meta, Apple and Amazon – alongside Thursday’s Federal Open Market Committee (FOMC) meeting. Domestically, all eyes turn to Wednesday’s all-important second quarter (Q2) consumer price index (CPI), previewed below.
AU: inflation rate June
Date: Wednesday, 29 July at 11.30am AEST
May’s CPI report saw annual headline inflation ease to 4.0% year-on-year (YoY) from 4.2% in April and well below the 4.4% consensus. However, the RBA’s preferred measure – the trimmed mean – rose to 3.6% YoY from 3.4% in April.
Consensus expects headline inflation to stay at 4.0% YoY in June, with the trimmed mean rising to 3.8%. This would put the Q2 CPI at around 3.7% YoY, up from 3.5% in the first quarter (Q1), leaving inflation on all metrics well above the midpoint of the RBA’s 2% – 3% target band.
An in-line or hotter-than-expected core reading would reinforce the RBA’s hawkish bias and raise the chances of a rate hike in August, while a softer print of 3.5% or less would help keep the RBA on the sidelines until the September Board meeting.
Ahead of the release, the Australian interest rate market is pricing in 7 basis points (bp) (a 28% chance) of a hike at the RBA’s 11 August Board meeting. A 25 bp hike is 94% priced for December, which would see the cash rate finish the year at 4.60%.
