AUD/USD has broken to its highest level in four weeks, but the rally still lacks a convincing domestic foundation. The Australian Dollar has benefited from a favorable global backdrop as risk appetite improved across Asia, the Dollar weakened broadly, and copper prices surged on worsening supply disruptions in Chile. Additional support came from New Zealand, where stronger-than-expected inflation data lifted the Kiwi and added momentum to antipodean currencies more generally.
Those tailwinds, however, are largely external. Whether the Aussie can extend its gains will depend far more on Australia’s labor market report due on Thursday. Employment has shown little net progress over the past two months, following a -40.7k decline in April and a 40.3k rebound in May, raising questions about whether tighter monetary policy, higher energy prices and geopolitical uncertainty are beginning to cool hiring. Consensus forecasts call for employment to rise by 15k in June while the unemployment rate is expected to remain at 4.4%.
The labor market data could also prove decisive for interest rate expectations. Investors currently see only about a one-in-five chance that the Reserve Bank of Australia will deliver a fourth rate hike this year in August. That leaves employment data with considerable scope to shift market pricing.
A disappointing report would strengthen the case that policy tightening is gaining traction and further reduce expectations for an August increase. On the other hand, another solid employment gain would reinforce the resilience of the economy and reopen the debate over additional tightening.
Technically, AUD/USD’s breach of 0.7020 temporary top suggests that rebound from 0.6864 is resuming. Firm break of 38.2% retracement of 0.7277 to 0.6864 at 0.7022 will argue that whole decline form 0.7277 has already completed, and pave the way to 61.8% retracement at 0.7119 and possibly above.
However, rejection by 0.7022, followed by break of 0.6964 support will argue that the rebound has completed as a correction. And in this case, fall from 0.7277 could be ready to resume through 0.6864 low.
