- AUD/USD recovers from a drop in the European session after hitting a one-week low amid a weaker dollar.
- A modest decline in US bond yields and a positive risk tone weigh on the USD .
- Expectations for more aggressive rate hikes from the Fed favor USD bulls and should cap the pair.
The pair AUD/USD finds some support near the 0.6700 level on Wednesday and attracts some buying near the monthly low. The pair is trading with a slight positive bias around the 0.6735-0.6740 area during the European session, although the short-term bias remains firmly in favor of the bears.
The dollar is struggling to build on the previous day’s big rally amid a modest drop in US Treasury yields. Apart of this, signs of stability in financial markets seem to put further downward pressure on the US dollar haven, and offer some support to the AUD, which is sensitive to risk. That said, a combination of factors should continue to act as a tailwind for the dollar and limit any significant gains for the AUD/USD pair.
The data on consumer inflation in the US, stronger than expected, only reaffirmed the expectations that the Federal Reserve will continue to raise interest rates at a faster pace. In fact, the markets have begun to value the possibility of a 1% rate hike at the next FOMC meeting on September 20-21 and another 75 basis point hike in November. This, in turn, should act as a tailwind for US bond yields and the dollar, warranting caution for AUD/USD bulls.
Prospects for more aggressive monetary policy tightening by the Fed, further COVID-19 lockdowns in China, and the protracted war between Russia and Ukraine have fueled sentiment. fears of a recession. All this should curb optimism in the markets and help limit the fall of the dollar, which suggests that the path of least resistance for the AUD/USD is to the downside.
Market participants now await the release of the producer price index PPI from the US, to be released later at the start of the North American session. This, coupled with US bond yields, could influence dollar price dynamics and provide some momentum to the AUD/USD pair. Traders will take inspiration from the broader risk sentiment to take advantage of some short-term opportunities around the pair.
AUD/USD technical levels
Source: Fx Street
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