GBP/AUD tests support at 1.88 amid AUD reboundSliding jobless rate lifts AUD & stokes wage growthAU CPI in focus & could weigh on GBP/AUD furtherJob gains & rising inflation could shift RBA outlook

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The Pound to Australian Dollar is under pressure and could push lower still if the latest Aussie employment and inflation figures lead the currency market to suspect that a faster change of Reserve Bank of Australia (RBA) monetary policy is in the pipeline.

Australia’s Dollar outperformed among major currencies and the AUD/USD exchange rate extended its Wednesday recovery from an earlier dip back beneath 0.72, which has placed GBP/AUD under pressure near an important level of technical support around 1.88.

This was after official data showed Australia’s unemployment rate falling to its lowest since August 2008 in December as the labour market created some 64.8k jobs, which made for a second consecutive blowout that could have implications for RBA monetary policy.

“At this rate, the unemployment rate will be well below 4% by the second half of this year, which is faster than we were expecting. It also means that the pressure on wages growth will pick up and we see annual wages growth running at 3% in the second half of this year which is also earlier than we previously expected,” says Diana Mousina, a senior economist at AMP Capital.

“Higher domestic wages and inflation means we now expect the RBA to start hiking interest rates in August (by 0.15%, taking the cash rate to 0.25%), three months ahead of our prior expectation of a November rate hike. We still expect the cash rate to end the year at 0.5%,” Mousina wrote in a Thursday review of the employment data.

Above: GBP/AUD at daily intervals with Fibonacci retracements of November recovery indicating likely areas of technical support.

GBP/AUD reference rates at publication:

Spot: 1.8830High street bank rates (indicative band): 1.8172-1.8304Payment specialist rates (indicative band): 1.8660-1.8737Find out about specialist rates, hereSet up an exchange rate alert, hereThe robust recovery in the local job market is important for the Aussie because without it the economy would be unlikely to generate the rate of wage growth necessary for the RBA to feel confident that its 2.5% inflation target can be sustainably achieved.

That confidence is a precondition of any eventual decision by the RBA to begin lifting its cash rate from the current 0.1%, which is something the bank has said it’s unlikely to do much before 2024.

However, analysts, economists and government bond pricing suggests that employment growth and inflation will lead the RBA to begin raising its cash rate as soon as the second quarter of this year, making next Tuesday’s inflation report for the final quarter 2021 an important event for the Aussie.

“Regular readers will know that we disagree with the RBA on the inflation outlook. We expect both inflation and wages pressures to emerge sooner and stronger than the RBA anticipates,” says Gareth Aird, head of Australian economics at Commonwealth Bank of Australia.

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“It is our expectation that the upcoming CPI will be the smoking gun that sees the RBA end the bond buying program at the February Board meeting. It should also lay the groundwork for a rate hike in late 2022,” Aird and colleagues wrote in a Wednesday research note.

Australian inflation rose by three percent in the year to the end of September 2021, leaving it at the top of the RBA’s two-to-three percent target band, and many analysts suspect that if it continues to rise in the months ahead the bank could potentially rethink its monetary policy guidance.

Anything that leads the RBA to bring forward the time at which it expects to begin lifting the cash rate could potentially lead the currency market to rethink its build up of bearish wagers against the Australian Dollar, which have been an uplifting influence on GBP/AUD during recent months.

“There is a full rate hike factored-in around mid-year and three and a half hikes by the end of 2022. That has not changed much since late 2021. The market view is also that the RBA will end its QE at the February meeting. So the market is hawkishly priced relative to recent RBA guidance,” writes Damien McColough, head of rates strategy at Westpac, in a Wednesday market commentary.

Above: AUD/USD shown at daily intervals with major moving-averages and Fibonacci retracements of November decline indicating possible areas of technical resistance to any further recovery.