- AUD/USD witnessed a dramatic turnaround from a two-week high hit earlier this Tuesday.
- The dollar rally after the US CPI turns out to be a key factor putting downward pressure on the pair.
- The risk aversion drive helps drive flows away from the Aussie, which is perceived as riskier.
The pair AUD/USD it retraces more than 135 pips from two-week highs reached earlier this Tuesday and falls to the 0.6780-0.6775 zone amid a strong rally in US dollar demand during the early American session. However, the pair manages to recover a few pips and breaks above the 0.6800 level again.
The dollar saw a sharp intraday reversal from the monthly low and strengthened across the board in reaction to stronger US consumer inflation figures. Indeed, the headline CPI unexpectedly rose 0.1% in August and the annual rate fell to 8.3%, beating estimates for a decline to 8.1%.
Also, the core CPI, which excludes volatile food and energy prices, rose 0.6% in August (0.3% expected) and rose to 6.3% year over year from 5.9% in July. The data revives bets for a more aggressive tightening of the Federal Reserve policy and gives a strong boost to the dollar.
Markets have started to price in the possibility of a big 100 basis point rate hike at the FOMC meeting in September and another 75 basis point rate hike in November. This is reinforced by the sharp rise in US Treasury yields, which, in turn, is seen as another factor underpinning the dollar.
The prospect of faster rate hikes by the US central bank, coupled with recession fears, trigger a new wave of risk aversion. This is evident from the sharp decline in equity markets, helping to drive flows away from the perceived riskier Australian dollar.
With the last leg down, the AUD/USD pair reverses a significant part of the gains recorded in the last two sessions. Furthermore, acceptance below 0.6800 will set the stage for a further depreciation move towards intermediate support at 0.6740-0.6730 on the way to the 0.6700 round figure.
Technical levels
Source: Fx Street
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