AUD/USD plunges amid weak jobs data, negative sentiment

The Aussie was down for two days in a row, losing nearly 1% during the Frankfurt session on Thursday as the recent rally has run out of steam, leading to a correction.

Australian labor market worsened markedly

The headline Employment Change statistic for Australia went negative as the Australian economy lost 14,600 jobs versus +22,500 projected and 64,000 a month ago. In addition, the unemployment rate increased to 3.5%, contrary to market expectations of no change from the prior readings of 3.4%.

Following the data, futures prices suggest a 60% possibility that the Reserve Bank of Australia will raise interest rates in February but also a 40% chance that the RBA will hold off, given that rates have risen 300 basis points since May.

“The Aussie has come under pressure after jobs data, which endorses the recent cautious stance by the Reserve Bank of Australia. Still, we’d need to see inflation come off more convincingly before making strong calls about the end of the RBA hiking cycle. We continue to favor AUD/USD on the back of positive external developments (China, risk sentiment).” analysts at ING think.

US data caused risk-off trading

The US Industrial Production was anticipated to fall for the third consecutive month in December, and it did, falling 0.7% month-over-month (and November’s 0.2% drop was adjusted down to a 0.6% decline). This reduced the year-over-year increase in industrial production to 1.65%, the lowest growth since March 2021. All subsectors were red except for utilities “since colder temperatures increased the demand for heating.”

Furthermore, US retail sales for December fell 1.1% month-over-month, the worst monthly decline since July 2021 and the second consecutive monthly decline.

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According to the survey, ten of thirteen retail categories declined last month, including automobiles, furniture, and electronics. The value of fuel station sales fell 4.6% as prices continued to fall. On a year-over-year basis, retail sales were steady at +6.0%, while core retail sales were up by 6.7%.

Lastly, the US PPI inflation fell 0.5% month-over-month, the most significant monthly decline since April 2020, decreasing the year-over-year PPI to +6.2%, the lowest level since March 2021. Sentiment deteriorated notably after these data, sending risk assets sharply lower, including the AUD/USD pair.

Fed’s governors sounded hawkish

The last days saw a barrage of Fed speakers, with James Bullard, president of the Federal Reserve Bank of St. Louis, stating that US interest rates must rise higher in order to reduce inflationary pressures. In the same light, Loretta Mester, president of the Federal Reserve Bank of Cleveland, applauded the Fed’s attempts to control inflation.

In addition, the president of the Kansas City Fed, Esther George, stated that the central bank must restore price stability, “which includes reverting to 2% inflation.” Recently, Lorie Logan, president of the Federal Reserve Bank of Dallas, advocated for a slower rate of rate hikes but also acknowledged the possibility of a higher rate ceiling.