AUD/USD remains on the defensive, downside looks limited ahead of FOMC minutes

• Sustained buying around the USD and risk aversion weighing on the perceived riskier AUD.
• The Fed’s dovish outlook and rising US bond yields push the dollar to a nearly two-year high.
• The crisis in Ukraine lifts commodity prices and the upbeat comments from the RBA offer some support to the pair.

The pair AUD/USD remains on the defensive in the middle of the European session on Wednesday, although it has managed to hold above the level of 0.7550.

Following the previous day’s sharp pullback from the 0.7660 area, the highest level since June 2021, the AUD/USD pair has moved lower on Wednesday and has been affected by a combination of factors. Market sentiment remains fragile amid Diminishing hopes for a diplomatic solution to end the war in Ukraine. Apart of this, expectations of a faster tightening of monetary policies by the Fed affected global risk sentiment, which was evident by risk aversion in equity markets. This, in turn, lifted the safe-haven USD to a nearly two-year high and acted as a headwind for the pair.

Investors seem convinced that the Fed would adopt a more aggressive policy stance and would raise interest rates by 100 basis points in the next two meetings. Additionally, Fed Governor Lael Brainard said on Tuesday that the US central bank could start shrinking its balance sheet at a rapid pace as early as the May meeting. This, along with concerns that new western sanctions on Russia would further fuel inflation, pushed US Treasury yields to a new multi-year high. This continued to support the dollar and put downward pressure on the AUD/USD pair, although the decline remains supported.

Uncertainty around Ukraine pushed up commodity prices, which, coupled with more aggressive comments from the Reserve Bank of Australia (RBA), offered some support to the Australian dollar., a currency linked to the prices of raw materials. It is worth remembering that the RBA withdrew its promise to be patient on Tuesday in the tightening of monetary policy and pointed out that the national economy remains resilient, with spending picking up after the setback caused by Omicrón. Investor markets open bearish positions around the AUD/USD pair.

Investors also seem reluctant and prefer to wait on the sidelines before the release of the FOMC’s policy meeting minutes, due later in the American session. Investors will be looking for further clues on the Fed’s monetary policy outlook, which will boost US bond yields and price dynamics around the USD. Aside from this, investors will take cues from the incoming geopolitical news to take advantage of some short-term opportunities around the AUD/USD pair.

AUD/USD technical levels