Australian Dollar Strengthens on Robust Jobs Data, US Dollar Holds Steady

The Australian Dollar (AUD) advanced against the US Dollar on Thursday after stronger-than-expected employment data reinforced expectations that the Reserve Bank of Australia (RBA) may maintain a tighter monetary policy stance for longer. Meanwhile, the US Dollar remained steady as easing trade tensions offset reduced expectations for near-term Federal Reserve rate cuts.

Australian Employment Data Boosts AUD

Australias labor market delivered a significant upside surprise in December. According to data released by the Australian Bureau of Statistics (ABS), seasonally adjusted Employment rose by 65.2K, sharply rebounding from a revised 28.7K decline in November and well above market expectations of a 30K increase.

At the same time, the Unemployment Rate fell to 4.1% from 4.3%, beating forecasts that had projected a rise to 4.4%.

Sean Crick, Head of Labour Statistics at the ABS, noted that employment gains were driven largely by younger workers, with more individuals aged 15–24 entering the workforce, contributing to both the increase in total employment and the decline in the unemployment rate.

The stronger labor data has reinforced market expectations that the RBA will remain cautious about easing policy too quickly, particularly as inflation risks remain elevated.

RBA Outlook: Inflation Risks Tilt Upward

The International Monetary Fund (IMF) has urged the RBA to proceed cautiously, pointing out that inflation has remained above the central banks 2%–3% target band for an extended period, despite headline inflation easing faster than anticipated in November.

Australias TD-MI Inflation Gauge rose to 3.5% year-over-year in December, up from 3.2% previously. On a monthly basis, inflation surged 1.0% month-over-month, marking the fastest pace since December 2023 and a sharp acceleration from the 0.3% increases recorded in the prior two months.

While headline CPI slowed to 3.4% YoY in November, its lowest level since August, it remains above the RBAs target range. Core inflation measures have also moderated only gradually, with trimmed mean CPI edging down to 3.2%.

RBA policymakers have acknowledged that although inflation has eased significantly from its 2022 peak, recent data points to renewed upward momentum. The central bank has assessed that inflation risks have modestly shifted to the upside, while downside risks—particularly from global growth—have diminished.

Board members now expect only one additional rate cut this year, with underlying inflation projected to stay above 3% in the near term before easing toward 2.6% by 2027.

US Dollar Steady as Trade Concerns Ease

The US Dollar Index (DXY), which tracks the Greenback against six major currencies, traded around 98.80, holding onto modest gains from the previous session.

The US Dollar found support after Bloomberg reported that US President Donald Trump had backed away from imposing tariffs on European countries opposing his push to gain control over Greenland. Trump had previously threatened 10% tariffs on eight European Union countries, but later signaled a willingness to step back from those measures.

President Trump also stated that the United States and NATO had “formed the framework of a future deal regarding Greenland,” though he provided no details on what such an agreement might involve.

Fed Rate Cut Expectations Pushed Back

Recent US labor market data has led investors to push back expectations for Federal Reserve rate cuts, with markets now pricing the first cut around June.

Fed officials have indicated little urgency to ease policy further until there is clearer evidence that inflation is sustainably moving toward the 2% target. Reflecting this shift, Morgan Stanley revised its outlook for 2026, now forecasting one rate cut in June followed by another in September, compared with earlier expectations for cuts in January and April.

China Developments Remain Key for AUD

Developments in China continue to be closely watched by AUD traders due to Australias strong trade ties with the region.

China‘s central bank, the People’s Bank of China (PBOC), kept its Loan Prime Rates (LPRs) unchanged, with the one-year and five-year rates holding at 3.00% and 3.50%, respectively.

Meanwhile, China‘s Industrial Production rose 5.2% year-over-year in December, accelerating from November’s 4.8%, supported by resilient export-driven manufacturing. However, Retail Sales increased just 0.9% YoY, undershooting both expectations and the previous months reading, highlighting uneven domestic demand.