AUD/USD rebounds although tensions between Israel and Palestine remain intact

• AUD/USD marks a new intraday high at 0.6380 as risk appetite improves market sentiment.
• The overall risk profile remains cautious due to worsening tensions in the Middle East.
• The USD Index is under selling pressure near 106.60 as attention turns to US inflation data.

The AUD/USD pair refreshes intraday highs at 0.6380, as investors trim short positions in risk assets executed due to the Middle East crisis amid the bellicosity between Israel and the Palestinian military group. The Australian asset’s recovery move could be a short-lived setback as market sentiment remains bearish.

S&P 500 futures recovered most of the losses generated in the European session, reflecting a recovery in risk appetite among market participants. The yield on the 10-year US Treasury bond fell sharply to near 4.70%. US markets remain closed on Monday for Columbus Day.

The US Dollar Index (DXY) faces selling pressure after a pullback move to near 106.60 as Dallas Federal Reserve (Fed) Bank President Lorie Logan draws less emphasis on rising interest rates More If long-term interest rates remain elevated due to higher term premiums. On the inflation outlook, Fed Logan cited “Progress on inflation is encouraging, but it is too early to be confident that it will move toward the Fed’s 2% target in a sustainable and timely manner.”

Meanwhile, investors are focused on US Consumer Price Index (CPI) data for September, due out on Thursday at 12:30 GMT. According to the consensus, the core CPI, which does not include the volatility of food and oil prices, will grow at a constant rate of 0.3%. Inflation reporting could raise hopes of a further interest rate hike by the Fed.

Regarding the Australian dollar, investors are anticipating a further interest rate hike by the Reserve Bank of Australia as inflation picked up in August due to rising oil prices. Worsening tensions between Israel and Hamas have improved the outlook for oil prices, which could further raise inflationary pressures on the Australian economy. The RBA could raise interest rates by 25 basis points (bps) to 4.35% by the end of the year.