AUD/USD pares Australian CPI-inspired gains and hits multi-month highs

• The AUD/USD pair pares some of its strong intraday gains and hits its highest level since August.
• The risk aversion momentum benefits the safe-haven USD and constrains the risk-sensitive Aussie.
• Bets on further rate hikes by the RBA should limit the pair’s retracement.

The pair AUD/USD It is back almost 50 points from its highest level since mid-August, reached earlier this Wednesday, and is currently hovering around the 0.7075 zone, up 0.40% on the day.

A fresh wave of global risk aversion trade drives some safe haven flows into the US dollar and turns out to be a key factor acting as a headwind for the risk sensitive Aussie. Market sentiment remains fragile amid concerns about economic headwinds stemming from the worst COVID-19 outbreak in China. In addition, the protracted war between Russia and Ukraine has fueled recession fears and dampened investor appetite for riskier assets.

The global flight to safety, coupled with the prospect of less aggressive Fed tightening, is putting some downward pressure on US Treasury yields. In fact, the CME’s FedWatch tool points to a greater than 90% probability of a minor rate hike of 25 basis points at the next FOMC meeting ending on February 1. This could stop any significant rally in the dollar and help limit any significant corrective pullback in the AUD/USD pair.

Elsewhere, stronger Australian consumer inflation figures released earlier this Wednesday give the Reserve Bank of Australia (RBA) reason to continue raising interest rates. This should help limit the fall in the AUD/USD pair. Therefore, any further pullback could still be seen as a buying opportunity, warranting some caution for bearish traders in the absence of any relevant economic releases in the United States (US).

Technical levels to watch