China, the world’s second-largest economy, has been considering implementing a substantial stimulus package to support its economy and drive up demand. This move is crucial for the Chinese economy as it accounts for one-third of Australian exports. The Australian economy heavily relies on trade, with a trade-to-GDP ratio above 50%. Additionally, about 20% of the workforce in Australia is engaged in trade-related jobs. Thus, any significant pickup in demand from China would prove to be a tremendous boon for the Australian economy and the value of the Australian dollar.
Investors and economists are eagerly awaiting the release of the US Jobs Report on Friday. Recent labor market data from the US has indicated tight labor market conditions. However, the US Jobs Report will have the final say on the state of the labor market. Key factors to consider in this report include wage growth, nonfarm payrolls, and the unemployment rate. A stable unemployment rate coupled with an increase in wage growth might compel the Federal Reserve to postpone rate cuts until the second quarter.
Tight labor market conditions play a crucial role in supporting wage growth and enhancing disposable income. As disposable income increases, there is a higher likelihood of an upsurge in consumer spending and demand-driven inflation. If inflationary pressures rise significantly, the Federal Reserve will be compelled to keep interest rates higher for a longer duration. However, a more hawkish rate path would have adverse effects, such as curbing spending and dampening demand-driven inflation by reducing disposable income.
Economists have predicted that average hourly earnings will rise by 3.9% in December on a year-over-year basis, slightly lower than the 4.0% increase seen in November. Additionally, there is an expectation that the unemployment rate will rise from 3.7% to 3.8%.
While the US labor market is the main focus, it is essential to consider the ISM Services PMI as well. A surprising increase in the Services PMI could lead to a decrease in expectations of a rate cut by the Federal Reserve in the first quarter of 2024. The services sector makes up more than 70% of the US economy, amplifying the significance of this indicator. Furthermore, it is important to pay attention to comments from Federal Reserve speakers as their reactions to the US Jobs Report can shape market sentiment.
The near-term trends of the AUD/USD currency pair are highly dependent on the outcomes of the US Jobs Report and ISM Services PMI. A boost in service sector activity, wage growth, and a stable unemployment rate could significantly impact investor expectations regarding a rate cut by the Federal Reserve in the first quarter. If labor market conditions in the US tighten further, it could result in monetary policy divergence that favors the US dollar.
From a technical analysis perspective, the AUD/USD has remained above the 50-day and 200-day Exponential Moving Averages (EMAs), indicating bullish price signals. A breakout above the resistance level of $0.67286 would support a further rally towards the $0.68096 resistance level. Nevertheless, if the AUD/USD drops below the $0.67 handle, it would provide an opportunity for the bears to test the 50-day EMA and the support level of $0.66162. The 14-period Daily Relative Strength Index (RSI) reading of 51.17 suggests that the AUD/USD might move towards the $0.68096 resistance level before entering overbought territory (usually above 70 on the RSI scale).
The implementation of a substantial stimulus package in China would have a significant impact on the Australian economy, given the strong trade relationship between the two countries. The outcome of the US Jobs Report and the ISM Services PMI will be crucial in determining market sentiment and investor expectations. Tight labor market conditions, wage growth, and inflationary pressures will play a crucial role in shaping the monetary policies of central banks. As markets continue to evolve, it is essential for investors to closely monitor these factors to make informed decisions regarding the Australian dollar and its potential movements in the weeks to come.
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