- AUD/USD has rebounded from its lowest level since July 2020, reached earlier this Tuesday.
- Risk appetite and declining US Treasury yields weigh on the USD and offer some support for the pair.
- Expectations of an aggressive Fed rate hike and recession fears benefit the USD and limit the pair’s rise.
The pair AUD/USD experienced good moves both ways during the first half of the European dunk session, struggling to find direction and consolidating in neutral territory around the 0.6950 level.
After falling to its lowest level since July 2020 at 0.6910 earlier in the day, the AUD/USD pair staged a recovery, although it was not continued. The US dollar appears to have entered a bullish consolidation phase amid a softer tone around US Treasury yields. Apart of this, strong rally in equity markets further weighed on safe-haven US dollar and gave some support to the perceived riskier Australian dollar.
However, prospects of more aggressive monetary policy tightening by the Federal Reserve helped limit deeper USD losses. Markets seem convinced that the Federal Reserve will have to take more drastic action to combat stubbornly high inflation and have been pricing in a further 200 basis point rate hike for the rest of 2022. In addition, growing market concerns about a weakening of global growth prevented the AUD/USD pair from rising further.
Strain on supply chains resulting from China’s zero COVID-19 policy, and rising oil and food prices due to the war in Ukraine, are sparking inflation fears.. This, coupled with expectations of rapid rate hikes in the US, raises concerns about a potential recession. Therefore, market attention will remain focused on Wednesday’s US CPI consumer inflation figures, which could influence the Fed’s policy outlook and provide a further directional boost to the AUD/USD pair. .
Meanwhile, US bond yields will continue to play a key role in driving dollar demand amid the absence of market-relevant economic releases. Investors could follow signs of risk sentiment from the broader market to take advantage of some short-term opportunities around the AUD/USD pair. However, the bias remains in favor of the bears and supports the prospects for an extension of the recent downtrend seen over the past month.
AUD/USD technical levels
Source: Fx Street
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