- AUD/USD remains under some selling pressure for the second successive day on Monday.
- Bets for more rate hikes by the Fed help revive the USD demand and exert some pressure.
- A softer risk tone also benefits the safe-haven buck and weighs on the risk-sensitive Aussie.
The AUD/USD drifts lower for the second successive day on Monday and drops to a one-and-half-week low, around the 0.6675 region during the Asian session.
A combination of factors assists the US Dollar (USD) to gain some positive traction on the first day of the new week, which, in turn, is seen exerting downward pressure on the AUD/USD pair. The recent hawkish signals by several Federal Reserve (Fed) officials reaffirmed market bets for another 25 bps lift-off at the next FOMC meeting in May. Adding to this, the incoming US macro data suggested that the world’s largest economy remained resilient and supported prospects for further policy tightening by the Fed.
The flash version of the S&P Global’s PMI survey showed that the overall business activity in the US private sector expanded at a faster pace in April, with the Composite PMI rising from 52.3 in March to 53.5, or the highest since May last year. The upturn was led by the service sector, where activity grew for a third successive month and at the fastest rate for a year. Adding to this, the gauge for the US manufacturing sector moved in the expansion territory for the first time since October 2022, indicating growth momentum.
The data reinforced expectations that the Fed will continue lifting interest rates to curb inflation and fuels worries about economic headwinds stemming from rising borrowing costs. This, in turn, tempers investors’ appetite for riskier assets, which is evident from a generally weaker tone around the equity markets. The anti-risk flow is seen as another factor that benefits the Greenback’s relative safe-haven status and weighs on the risk-sensitive Aussie, suggesting that the path of least resistance for the AUD/USD pair is to the downside.
That said, the recent pullback in the US Treasury bond yields might hold back the USD bulls from placing aggressive bets. Apart from this, the hawkish tone from the Reserve Bank of Australia’s (RBA) April meeting minutes and the upbeat China macro data released last week should help limit losses for the AUD/USD pair. There isn’t any relevant market-moving economic data due for release from the US on Monday. Hence, traders will take cues from the broader risk sentiment to grab short-term opportunities around the pair.
Technical levels to watch
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On Wednesday, the AUD/USD weakened further below 0.6700, setting a one-week low as modest U.S Dollar strength weighed on the Australian Dollar.
The AUD/USD has been in a downward trend since late July, and seems to be continuing the pattern with Wednesday’s break below the 0.6700 level. Prices temporarily retreated from this level at the start of the week, but a renewed uptick in the US Dollar was enough to weigh further on the Australian Dollar and push the pair further downward.
The renewed USD strength is largely due to ongoing vaccine optimism and economic stimulus prospects in the United States. This is apparent in the market’s reaction to the latest economic data releases, namely the August Producer Price Index (PPI) report, which showed a slight uptick in inflationary pressures, suggesting a gradual build-up of price pressures.
These factors have helped buoy demand for the US Dollar and pushed the AUD/USD down further. The Aussie has seen further losses since the latest Reserve Bank of Australia (RBA) meeting, where the bank decided to maintain interest rates at 0.25%. The decision was largely priced in, but RBA’s accompanying commentary noted that the Australian economy was facing considerable uncertainty. This was enough to dampen the risk sentiment and push the AUD/USD further down.
Looking ahead, traders will keep a close eye on market sentiment and economic developments in both U.S and Australia. The direction of the AUD/USD will depend largely on these developments, so traders should monitor the data closely for further clarity.
