AUD/USD Edges Lower Ahead of RBA Rate Announcement

 | Jun 05, 2023 06:17AM ET

  • US nonfarm payrolls surge, unemployment climbs
  • RBA expected to pause at Tuesday’s meeting

    • The Australian dollar is coming off a strong week, with gains of 1.35%. AUD/USD has edged lower on Monday, trading at 0.6594, down 0.17%.

    h2 US nonfarm payrolls surge/h2

    Friday’s US employment report was a reminder that the labor market remains robust. Payrolls surged by 339,000 in May, crushing the estimate of 195,000. The April reading was revised upwards to 294,000 from 253,000, another sign of a strong labor market. However, this was not the entire story. The unemployment surprised to the upside, rising from 3.4% to 3.7%, while wage growth ticked lower to 0.3%, down from 0.4%.

    The takeaway from the mixed jobs report is that job growth remains surprisingly strong, but at the same time, there are signs the labor market is losing some steam. The pockets of softness in the report could be enough for the Fed to opt for a pause at the June 14th meeting, after ten straight rate increases.

    Market expectations have been all over the place, as it has been a tricky task to pin down what the Fed has planned. A month ago, the markets put the probability of a pause at 91%. This fell to 36% a week ago and has bounced back up to 78%. With a blackout period starting today, we won’t have any Fed speak to provide insights on the Fed’s thinking ahead of the meeting.

    h2 Will RBA take a pause?/h2

    The Reserve Bank of Australia meets on Tuesday, and the meeting is live, with the market's pricing in a pause at 67% and a 25-basis point hike at 33%. Just a week ago, the markets had priced in a pause at a massive 97%.

    The RBA is in a pickle, as inflation remains high and the employment market is tight but growth has cooled down. Inflation is at 7%, well above the RBA’s target of 2-3%. Governor Lowe has been hawkish and said last week that the Bank will do whatever it takes to bring inflation back down to target, and Lowe shocked the markets with a rate hike in May. A pause seems the more likely move, but as we have seen, Lowe has a habit of surprising the markets.