Financial markets have revised their expectations for interest rate cuts by both the Federal Reserve and the Reserve Bank of Australia. This adjustment follows the release of strong US jobs data, which alleviated concerns about an impending slowdown in the US economy. US employers added 147,000 jobs in June, exceeding the anticipated gain of 106,000. The unemployment rate also declined, falling from 4.2 per cent in May to 4.1 per cent, below forecasts of 4.3 per cent.
The robust US labour market data has reduced pressure on Federal Reserve chairman Jerome Powell, who has adopted a cautious approach to cutting rates. Bond traders now see a significantly reduced probability of a Fed rate cut this month, and the likelihood of a reduction in September has also decreased. Seema Shah, chief global strategist for Principal Asset Management, noted that the employment data dispels the case for imminent easing by the Fed.
In Australia, while bond traders still anticipate a rate cut by the RBA this week, the odds of a subsequent move in August have decreased. ANZ has suggested that the RBA’s decision is “a much closer call than market pricing would suggest”. Citi has warned against front-loaded rate cuts by the RBA, suggesting a hawkish surprise could further bolster the Australian dollar.
The Australian dollar has recently hit an eight-month high. Westpac strategist Imre Speizer indicated that the Aussie could find support from a cautious RBA. Currency traders are also monitoring the US House of Representatives’ passage of a substantial fiscal package, which could reignite inflationary pressures and impact bond yields and the US dollar.
