AUD/USD falls as US Dollar firms on labor data, Australian inflation disappoints

• The US Dollar finds support following mixed US labor market data.
• The US labor market shows signs of cooling but remains broadly resilient.
• The Australian Dollar stays under pressure after weaker-than-expected inflation data.

AUD/USD trades lower on Friday, with the pair hovering around 0.6680 at the time of writing, down 0.23% on the day. The move mainly reflects renewed support for the US Dollar (USD), against a backdrop of mixed macroeconomic releases in the United States (US), while the Australian Dollar (AUD) remains weighed down by softer expectations for monetary tightening in Australia.

The US Dollar is supported after the release of December labor market data in the United States. Figures from the Bureau of Labor Statistics showed that job creation slowed, with only 50,000 new jobs added, falling short of market expectations. However, the Unemployment Rate edged down to 4.4%, while wage growth picked up. Average Hourly Earnings rose 0.3% on the month and 3.8% on a yearly basis, signalling that wage pressures persist despite a gradual cooling in the labor market. Overall, the data point to a US economy that is slowing moderately but remains relatively resilient.

Against this backdrop, monetary policy expectations remain cautious. Investors believe that the Federal Reserve (Fed) can afford to wait before further easing policy. Markets largely expect rates to remain unchanged at the January meeting, while the chance of a March rate cut has declined. This outlook supports the US Dollar and limits upside potential for AUD/USD.

US consumer sentiment also provides indirect support to the Greenback. The preliminary University of Michigan Consumer Sentiment Index rose in January to its highest level in several months, while one-year and five-year inflation expectations remain elevated. These elements reinforce the view that the Fed must stay vigilant on inflation risks, even in a softer growth environment.

On the Australian side, the Australian Dollar is under pressure following disappointing inflation figures. November Consumer Price Index (CPI) data showed a sharper-than-expected slowdown, with yearly inflation easing to 3.4%. This development has led investors to scale back expectations of a near-term policy tightening by the Reserve Bank of Australia (RBA). According to Reuters, the chance of a rate hike at the February meeting is now seen as limited.

The combination of a US Dollar supported by relatively solid economic data and an Australian Dollar weakened by fading monetary tightening expectations weighs on AUD/USD. As long as markets continue to price in a cautious Fed and a more accommodative stance from the RBA, the fundamental bias for the pair is likely to remain to the downside.