AUD/USD Forecast: Labour Data May Force RBA Rate Rethink

Summary

The upcoming Australian wages and employment data is poised to challenge the current market narrative regarding the Reserve Bank of Australia's (RBA) patience with interest rates. The RBA has indicated that the labour market remains tight, and any strong outcomes from the data could reshape expectations for future interest rate adjustments.

Labour Market Report Card Due

The focus is on Australia's Wage Price Index (WPI), with a quarterly growth expectation of 0.8%, maintaining an annual pace of 3.4%. Historically, this data release aligns closely with consensus forecasts, often resulting in minimal market reactions. However, given the current uncertainty regarding the RBA's policy direction, any surprises could have significant implications for Australian markets.

Particular attention will be on the private sector component, which previously underperformed. A continuation of this trend could indicate underlying economic momentum issues.

Labour Force Survey

The Labour Force Survey is expected to show a slight increase in unemployment to 4.2%, reversing a previous decline. Participation rates are anticipated to rise to 66.8%, although the overall trend has been declining. Employment growth is forecasted to increase by 20,000, a significant drop from December's figures.

The RBA is particularly focused on unemployment rates and broader labour demand measures, which will inform their assessment of the labour market's health.

RBA Takeaways

The RBA's recent minutes indicate a comfort with the current labour market state, describing it as "a little tighter than consistent with full employment." This suggests potential for stronger wage pressures. If the upcoming data aligns with forecasts, the RBA may consider a follow-up rate hike in March, which could support the Australian dollar.

Rate Pricing Reality Check

Market expectations currently lean towards a cautious approach from the RBA, with a low probability of a rate hike in March. However, recent economic momentum raises questions about this conservative pricing. The RBA's forecasts suggest that at least two additional hikes may be necessary to manage inflation effectively.

Global Crosswinds Stir

While Australian data is the immediate focus, global factors, particularly from the United States, are expected to influence markets later in the week. Key U.S. economic releases could shift market sentiment significantly.

AUD/USD Technical Picture

The AUD/USD pair remains in a bullish trend, although indicators suggest that upward momentum may be waning. Key levels to watch include support around 0.7050 and resistance near the February 2023 high. A break above these levels could signal a continuation of the uptrend.