AUD/USD falls to its lowest level since mid-July and looks vulnerable to further weakness

• AUD/USD struggles to capitalize on its intraday gains despite a further 50 basis point rate hike by the RBA.
• The risk-on environment undermines the dollar’s safe haven, while not benefiting the risk-sensitive Aussie.
• Fed expectations favor USD bulls and support prospects of further losses for the pair.

The pair AUD/USD saw an intraday turnaround from the 0.6830-0.6835 area on Tuesday and fell to its lowest level since mid-July during the first half of the European session. The pair is currently hovering around the 0.6760 area and looks vulnerable to prolonging an almost month long downtrend.

Despite the Reserve Bank of Australia’s decision to raise interest rates by 50 basis points, the Australian dollar is struggling to build on its modest intraday gains. Expectations that the Reserve Bank of Australia is nearing the end of its rate hike cycle turn out to be a key factor acting as a headwind and attracting further selling around the AUD/USD pair.

Not even the risk boost, seen dragging the safe-haven US dollar from two-decade highs hit the day before, fails to impress the bulls. Global risk sentiment stabilizes after China pledged further efforts to boost its economy. However, this has not been supportive of the risk-sensitive Aussie.

Rising recession fears, coupled with economic headwinds stemming from further COVID-19 cuts in China and the ongoing war in Ukraine, should dampen any bullish moves. Aside from this, dovish expectations from the Fed should limit dollar losses, suggesting the path of least resistance for AUD/USD is to the downside.

Indeed, markets seem convinced that the Fed will maintain its aggressive policy tightening and have been pricing in a higher probability of a 75 basis point rate hike at the September meeting. This is reinforced by a further rise in US Treasury yields, supporting the prospect of some dollar buying.

Market participants now await the US economic docket, with the release of the ISM Services PMI on Tuesday. The data could influence the price dynamics of the dollar and give some momentum to the AUD/USD pair. Next, attention will turn to the quarterly Australian GDP report, due in the Asian session on Wednesday.

Technical levels