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The Australian Dollar was softer after domestic employment data encouraged markets to raise expectations for interest rate cuts from the Reserve Bank of Australia (RBA) later in 2024.

Employment in Australia rose by just 0.5k in January after a fall of 62.7k in December, said the ABS; the unemployment rate increased to 4.1%, and the participation rate was flat at 66.8%.

The market was clearly more optimistic, having expected 30K jobs to have been created and the unemployment rate to have risen to 4.0% from 3.9%.

"A soft report all round despite some seasonal issues," says economist Gareth Aird at Commonwealth Bank of Australia. "The labour market continued to loosen in January."

Aird's colleague, FX strategist Carol Kong, says, "AUD/USD dipped slightly to around 0.6485 after the weaker than expected Australian labour force survey prompted markets to bring forward their expectations for RBA rate cuts."

Meanwhile, the Pound to Australian Dollar exchange rate avoids any AUD-related blowback owing to the more powerful forces dragging on the Pound in the shape of disappointing GDP data on Thursday and Wednesday's softer-than-expected inflation report.

Markets are now pricing about an 84% chance of the first RBA rate cut by August following the employment report, and Australian government bond yields dropped more than 10bp across the curve, which is dragging on AUD performance.

But analysts at ANZ are more circumspect and don't see an RBA interest rate cut happening before November.

"January labour market data came in weaker than expected, but there were some atypical movements and seasonality appears to be changing. This may mean the RBA doesn’t put too much weight on this release and looks to future releases for more accurate gauges on underlying labour market momentum," says Blair Chapman, Senior Economist at ANZ.

He explains that January is a typically weak month, and the number of people employed leaving the labour force in January is elevated relative to pre-COVID levels.

The ABS meanwhile noted there were more unemployed people expecting to start a job in the next four weeks than usual, which increased the unemployment rate.

"The number of people taking leave in January was also elevated. The ABS’s seasonal adjustment processes may not be accounting for these changes in behaviour over recent years. So, the RBA may not read too much into this month’s figures. There is no change to our RBA view off the back of these data," says Chapman.