AUD/USD pares intraday losses amid weaker dollar, dipping modestly around 0.6700

• The AUD/USD falls for the second day in a row, although it has no continuity in selling.
• China’s COVID-19 weighs on investor sentiment and undermines the Aussie’s risk appetite.
• The dollar remains depressed amid bets on less aggressive Fed rate hikes and offers support.

The pair AUD/USD it opens with a modest bearish gap on the first day of a new week and remains depressed at the beginning of the American session. However, the pair bounces a few points from the 3-day low and now appears to have stabilized around 0.6700.

Global risk sentiment takes a hit amid worsening COVID-19 situation in China and steers flows away from Australian dollar risk sentiment. In fact, China reported a record number of daily infections on Saturday. In addition, public discontent and widespread protests over the Chinese government’s COVID-19 policy raise fears of a further slowdown in economic activity. This, in turn, triggers a new wave of risk aversion trading, although the emergence of strong US dollar selling helps limit the AUD/USD pair’s decline.

The November FOMC meeting minutes, released last week, consolidated market bets in favor of a relatively minor 50 basis point rate hike by the US central bank in December. This, along with the flight to safety, is contributing to the ongoing decline in US Treasury yields and dragging the dollar back towards the monthly low. The fundamental background makes it prudent to wait for strong selling before confirming that the AUD/USD has topped out. Furthermore, the absence of market-relevant economic releases warrants some caution for aggressive bears.

Market participants are watching speeches from influential FOMC members: St. Louis Fed President James Bullard and New York Fed President John Williams. This, coupled with US bond yields and broader risk sentiment, will boost demand for the dollar and provide some lift to the AUD/USD pair. However, the focus will be on this week’s important US macroeconomic data, including the closely watched monthly employment report (NFP), and new developments in China.

Technical levels to watch