In the Asian session on Thursday, key labor market data was published in Australia. The release turned out to be weaker than expected, with almost all indicators being in the red zone. The AUD/USD pair reacted by falling to the 0.6630 level. The Aussie came under pressure as weak Australian nonfarm payrolls reduced the likelihood of a rate hike by the RBA at the next meeting in June. Although the trajectory of the pair has been mainly shaped by the US currency, today's release significantly undermined the positions of the AUD/USD buyers.
In terms of numbers
It is worth noting that over the past few months, the Australian labor market has favored the Aussie. For example, the April report surprised market participants with fairly strong numbers compared to preliminary forecasts. However, the May release turned out to be the opposite. The unemployment rate rose to 3.7% against an expected increase of 3.5%. On one hand, this indicator remains at a 50-year low, but on the other hand, its increase was unexpected for most experts.
Another equally important component of the report was also disappointing. The employment change for April decreased by 4,000, while most experts predicted an increase of nearly 30,000. This indicator entered negative territory for the first time since January of this year. In February and March, there was significant growth of 63,000 and 61,000, respectively. Moreover, the structure of the April report indicates that the decline was driven by an increase in part-time employment with a simultaneous sharp decrease in full-time employment (ratio of 22.8/-27.1 thousand). It is known that permanent job positions usually imply higher wages and a higher level of social security compared to temporary jobs. Therefore, the current trend in this regard is entirely negative.
All of this suggests that today's report turned out to be weak across the board, reflecting not only a decline in employment but also an increase in unemployment.
The unexpected decline in employment in April after two months of rapid growth, as well as the increase in the unemployment rate, indicate a possible cooling of the labor market, reinforcing a dovish sentiment regarding further actions of the Reserve Bank of Australia.
On Tuesday, the minutes of the RBA's May meeting were published, following which the regulator raised the interest rate by 25 basis points after a pause in April. The published document is quite contradictory. Although AUD/USD traders interpreted it in favor of the Aussie, its overall tone is neutral.
For example, the minutes state that RBA board members considered the possibility of a pause at the May meeting, but inflationary risks justified the 25 basis point rate hike. The document indicates that "the members of the regulator considered two options and deemed it appropriate to raise interest rates at this meeting."
However, the future prospects for monetary policy tightening remain uncertain. The RBA minutes state that additional interest rate hikes may be required in the future but this will depend on how the economy and inflation develop.
There is no doubt that the deterioration of the labor market situation will reduce the hawkish sentiment of the RBA, especially if inflation eases.
USD still has the upper hand
The weak Australian nonfarm payrolls put pressure on the AUD/USD pair, but the future of the pair in the medium term depends on the greenback which continues to gain momentum amid growing risk-off sentiment.
The latest negotiations between Republicans and Democrats regarding the increase in the US debt ceiling ended without any progress despite the optimistic statements by the US President. The parties only agreed to continue negotiations. The next round of negotiations will take place no earlier than Saturday and Sunday. According to the White House, the US President will return to Washington after the G7 summit in Hiroshima, which will take place from May 19 to 21, "to continue meetings with congressional leaders and ensure that actions are taken to prevent default by the deadline."
The stalled debt ceiling negotiations continue to increase concerns about default, thereby strengthening the safe-haven greenback. The US dollar index is once again demonstrating a positive trend today, approaching the 103 level.
Conclusion
The existing fundamental background for the AUD/USD pair contributes to the development of the downtrend. Weak nonfarm payrolls and concerns about a possible default in the US are limiting the pair's upside potential. Technically, the Aussie is currently testing the lower line of the Bollinger Bands indicator on the 4-hour chart (0.6630). If bears overcome this level, then the next downside target will be 0.6570, which is the lower line of the Bollinger Bands indicator on the daily chart.
