The AUD/USD pair gains slightly to near 0.6605 during the European trading session on Friday. The Aussie pair moves higher as the Australian Dollar (AUD) gains amid easing bets supporting interest rate cuts by the Reserve Bank of Australia (RBA) in the policy meeting in November.
According to a Reuters report, Futures now imply around a 45% chance that the RBA will cut its Official Cash Rate (OCR) by 25 basis points (bps) in the November policy meeting.
RBA dovish bets have eased as inflationary pressures in the Australian economy are proving to be persistent. “Components of the monthly CPI are a little higher than expected, and inflation is not running away,” RBA Governor Michele Bullock said at a post-meeting press conference in late September.
Analysts at ANZ have also dropped their view of an interest rate cut by the RBA in the policy meeting next month.
Meanwhile, the US Dollar (USD) remains on the back foot amid the United States (US) government shutdown and the weakening job market. Partial US government closure has resulted in a halt of key economic data releases, including Nonfarm Payrolls (NFP) for September that was scheduled to be released on Friday.
Cooling US job demand has boosted speculation for more interest rate cuts by the Federal Reserve (Fed) in the remainder of the year.
According to the CME FedWatch tool, traders have almost fully priced in a 25 basis points (bps) interest rate reduction by the Fed in the policy meeting later this month. Traders also see an 87% chance that the Fed will also cut interest rates by a similar size in the December meeting.
(The story was corrected at 11:00 GMT to say in the second bullet point that traders pare RBA dovish bets as inflation proves to be persistent, not Fed)
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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