AUD/USD falls to 1-week lows and stands below 0.6900 against a backdrop of risk aversion

• The AUD/USD pair continues to lose ground for the second day in a row and sinks to a week low.
• Recession fears weigh on investor sentiment and keep flows away from the risk-sensitive Aussie.
• Bets on lower Fed rate hikes continue to undermine the dollar, even if they barely support it.

The pair AUD/USD continues last night’s sharp pullback from the 0.7060-0.7065 zone, ie its highest level since August 16, and remains under strong selling pressure for the second day in a row on Thursday. The bearish trajectory remains uninterrupted in the middle of the European session and drags the pair to a week low, around the 0.6875 zone in the last hour.

The prevailing risk-off environment, represented by a sea of ​​red in equity markets, is seen as a key factor pulling flows away from the risk-sensitive Aussie. Weak US macroeconomic data released on Wednesday adds to concerns about economic difficulties stemming from China’s worst-ever outbreak of COVID-19 on record. This, in turn, fuels recession fears and takes its toll on global risk sentiment.

AUD/USD bulls, meanwhile, are failing to catch a breather from a weaker US dollar, which remains depressed amid expectations of less aggressive Fed tightening. Indeed, markets they now seem convinced that the US central bank will soften its stance and offer a smaller rate hike of 25 basis points in February. This causes a further decline in US Treasury yields and weakens the dollar.

Thursday’s decline could further be attributed to some technical selling below the 0.6935 horizontal support. A subsequent break below 0.6900 is seen as a further trigger for bears and supports prospects for further losses. Market participants are now looking forward to the US economic agenda, which, coupled with broader risk sentiment, should provide some momentum for the AUD/USD pair.

Technical levels to watch