AUD / USD clings to gains near 0.7035-40 zone, focus shifts to RBA decision Tuesday

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  • The risk appetite boost sparked some short hedging moves around the perceived riskier Aussie.
  • Aggressive expectations from the Fed propped up the USD and could limit the rise in AUD / USD.
  • Investors are now looking forward to Tuesday’s RBA decision to get a significant boost.

The pair AUD/USD it maintained its offered tone during the middle of the American session and was last seen trading near the upper end of its daily trading range, around the 0.7035-40 zone.

Having shown some resistance below the key psychological level 0.7000, the AUD / USD pair witnessed some short hedging moves on Monday and recovered a portion of the previous day’s losses to a new yearly low. Global risk sentiment leveled off somewhat in reaction to reports from South Africa, which suggested that the Omicron patients had only relatively mild symptoms. This, in turn, led to a strong recovery in equity markets and benefited the Australian dollar perceived as riskier.

Market optimism received an additional boost after the People’s Bank of China (PBOC) cut the bank’s reserve requirement ratio (RRR) by 50 basis points, freeing up 1.2 trillion yuan of long-term liquidity. Despite supporting factors, the rally lacked bullish conviction amid the prevailing bullish sentiment around the US dollar. The prospects for faster policy tightening by the Fed acted as a tailwind for the dollar and could limit AUD / USD gains.

Investors appear to be convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation and have been weighing the possibility of an increase by May 2022. Aside from this, the recovery in yields from US Treasuries favors USD bulls. This, in turn, makes it prudent to wait for a strong follow-up buy before confirming that the AUD / USD pair has formed a base and short-term positioning for any further appreciation moves.

There is no major market-moving economic data that needs to be released in the US, leaving the USD at the mercy of US bond yields. Aside from this, developments surrounding the coronavirus saga and broader market risk sentiment will influence USD price dynamics. This should give AUD / USD some momentum ahead of the RBA’s policy decision on Tuesday.

Technical levels

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