The Australian dollar against the US currency is testing the 0.68 figure for the second day running, sliding toward three-month price lows. The greenback is leading the southward move as it strengthens across markets on rising hawkish expectations for further Fed action. The Aussie is also contributing to the downside after a weak inflation report and mixed Australian labor market data. That gives bears a good chance to break support at 0.6890 (the lower line of the Bollinger Bands on the daily chart) and hold within the 0.68 figure.

Let us start with the published May CPI data. The most notable feature is a slowdown in headline inflation. The year-on-year pace of the headline consumer price index fell to 4.0% from April's 4.3%. The indicator has shown a downward trend for a second month after peaking at 4.6% in March. Notably, this component of the report printed in the red because the market had expected inflation to accelerate to 4.4% amid the Middle East crisis and a jump in oil prices (recall that the report covers May, when the Strait of Hormuz was fully blocked). Actual readings were substantially weaker than forecasts.

What does this mean? Primarily, that the oil factor has stopped driving inflation higher. In May fuel prices fell, easing pressure from transport costs. A slowdown in transport price growth was one of the main contributors to the drop in headline CPI.

For the Reserve Bank of Australia, this is an important, arguably key, signal because the energy shock was considered the main risk behind the spring inflation wave.

Another argument against the Aussie is a decline in households' inflation expectations. According to the latest ANZ surveys, inflation expectations fell to 6.3% in May from 7.0% in April (long-term expectations fell to 5.8%). This is significant (including for the RBA), since falling inflation expectations typically precede a slowdown in actual inflation.

On the other hand, core inflation (the trimmed mean) unexpectedly accelerated in May, from 3.4% to 3.6% year-on-year, indicating that domestic price pressures have not disappeared. Nevertheless, markets focused on the fall in headline CPI, which has slowed for a second month contrary to expectations. Those dynamics lower the probability of further RBA rate hikes in the near term.

Today's labor market data for May merely reinforced the broader fundamental picture, despite an apparently strong headline: employment rose by 40,000 (after April's decline), and the unemployment rate fell to 4.4% from 4.5%.

However, the release's composition signals worrying trends.

First, most new jobs were in part-time work, while full-time employment showed only modest growth (a 35,000/5,000 split). The market values sustained full-time job creation more highly: employment growth driven by part-time roles usually indicates that employers are reluctant to expand permanent headcount. This is one sign of a gradual cooling labor market.

The second negative signal is a 1.1% monthly fall in total hours worked. This is arguably the weakest component of the May report and largely offsets the positive headline. Formally there are more jobs, but the economy has effectively gained fewer labor hours. That pattern points to falling business activity and weaker demand for labor from firms.

The third negative signal is a decline in vacancies. Data published this week show open vacancies fell 2.1% quarter-on-quarter and 2.1% year-on-year in Q2, with particularly sharp drops in demand for workers in finance and services. Vacancies are a leading labor market indicator: declines typically precede slower hiring and higher unemployment in subsequent months.

May's labor data should be viewed in the wider macro context. Q1 GDP was weak, consumer activity remains unstable, and high borrowing costs continue to weigh on domestic demand. In such conditions even a moderate deterioration in the labor market could soon translate into a more pronounced weakening of employment.

In short, this week's macro releases have substantially reduced the likelihood of further RBA rate hikes. Moreover, markets are now discussing the possibility of policy easing in H2. A widening divergence between Fed and RBA monetary policy is putting pressure on AUD/USD and supporting further downside.

That said, entering new short positions is prudent only after sellers force a clear break of 0.6890 (the lower line of the Bollinger Bands on the daily chart), which would open the way to the next barrier at 0.6850 (the lower line of the Bollinger Bands on the weekly chart).