Despite the Reserve Bank of Australia (RBA) saying at its May meeting that more rate increases may be required, investors are nearly convinced that it will take no action at the June gathering, and evenly split on whether another 25bps may be warranted in August or September. So, to get a better sense of how the RBA may proceed henceforth, they may pay close attention to wage growth and employment data, due out on Wednesday and Thursday, respectively.
Market expects the RBA to return to the sidelines
At its latest gathering, the RBA raised interest rates by 25bps, stunning investors who were expecting officials to stay sidelined for the second time in a row. Policymakers decided to hike due to stubbornly high services inflation and faster-than-expected rental increases, adding that more hikes may be required depending on how the economy and the inflation outlook evolve.
In the minutes of that meeting, released today, it was revealed that board members were considering staying sidelined for another month, but the inflation risks convinced them that a hike was a more appropriate decision.
Having said all that though, despite officials saying that more hikes may be required, and despite Australia’s consumer prices increasing 6.3% year-on-year in March, market participants are currently assigning an 87% probability for no change at the upcoming meeting in June, with the remaining 13% pointing to another quarter-point hike.
Perhaps that’s due to inflation being in a downtrend since December, when it hit 8.4% y/y, and due to Chinese data suggesting that after the post-reopening boost, the world’s second largest economy and Australia’s main trading partner is losing momentum.
Will the jobs data increase the chances of another hike?
Beyond June, investors are pricing in around a 30% chance for a quarter-point hike in July, while they are evenly split for August and September. So, as they try to better understand how the RBA could proceed later this year, they may pay attention to the wage price index for Q1 and the employment report for April, due out during the Asian sessions Wednesday and Thursday, respectively.
Wages are forecast to have continued to accelerate for the 9th consecutive quarter, which could add to concerns about inflation staying elevated, and although the employment change is expected to show that the economy added less than half the jobs it gained in March, the unemployment rate is seen holding steady at 3.5%, just a tick above its record low of 3.4%.
A tight labor market and rising wage growth, which according to the S&P Global services PMI, is contributing to accelerating price pressures for firms in Australia, could prompt investors to price in a higher probability for a hike during the summer months.
Aussie may be destined to stay weak for a while longer
This could prove positive for the Australian dollar, but its upside may be capped by market participants’ concerns over the outlook of the Chinese economy. With the Fed expected to proceed with nearly three quarter-point cuts by the end of the year, the picture in ausie/dollar may not be so clear, but with the ECB seen hiking by another 50bps, euro/aussie may be destined to continue its uptrend for a while longer, even if the Australian currency temporarily benefits by this week’s data.
Euro/aussie has been in a sliding mode since April 26, when it hit resistance at 1.6790, a territory that threw the bulls out of the game back in October 2020 as well. Nonetheless, the pair remains above the uptrend line drawn from the low of August 26, which keeps the bigger picture positive.
Even if the slide extends beyond last week’s low of 1.6135, the buyers could still step back into the action from near the uptrend line and perhaps stage another march towards the 1.6790 zone. If they manage to break that zone, they could then put the 1.7190 area on their radar, which offered resistance back in early May 2020.
The outlook could start darkening if the bears are able to break the aforementioned uptrend line, but also the 1.5870 support. Should this happen, they may get encouraged to dive towards the 1.5655 territory, marked by the inside swing high of February 6, the break of which could see scope for extensions towards the 1.5260 area, which acted as a floor between November 4 and January 30.
 saying at its May meeting that more rate increases may be required, investors are nearly convinced that it will take no action at the June gathering, and evenly split on whether another 25bps may be warranted in August or September. So, to get a better sense of how the RBA may proceed henceforth, they may pay close attention to wage growth and employment data, due out on Wednesday and Thursday, respectively.){kind=link}