The AUD/USD pair has retreated slightly from a one-week high and currently trades just below the 0.6700 mark during the first half of the European session. However, it is still up over 1% for the day. The Australian Dollar (AUD) has strengthened across the board in response to the Reserve Bank of Australia’s (RBA) surprise 25 basis points rate hike and hawkish outlook. The Australian central bank indicated that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe. This has prompted an aggressive short-covering rally around the AUD/USD pair, although the momentum loses steam near the 0.6715 area.
The US Dollar (USD) has reversed an intraday dip and holds steady near a two-week high set earlier this Tuesday amid expectations for an additional 25 basis points lift-off at the end of the two-day FOMC monetary policy meeting on Wednesday. The bets were reaffirmed by the US ISM PMI report released on Monday, which showed that business activity in the manufacturing sector pulled off a three-year low in April and that there was a build-up of inflation pressures last month.
The prospects for further policy tightening by the Federal Reserve (Fed) add to worries about economic headwinds stemming from rising borrowing costs. This tempers investors’ appetite for riskier assets, as evident from a softer tone around the equity markets. The anti-risk flow further benefits the Greenback’s relative safe-haven status and contributes to keeping a lid on any further gains for the AUD/USD pair, at least for the time being.
However, markets now expect that the US central bank will signal a pause in its rate-hiking cycle beyond May. This might hold back the USD bulls from placing aggressive bets and continue to act as a tailwind for the AUD/USD pair ahead of the highly-anticipated FOMC decision, scheduled to be announced on Wednesday. In the meantime, traders on Tuesday will take cues from the release of the US JOLTS Job Openings data, due later during the early North American session.
Looking at technical levels to watch, if the pair manages to break through the 0.6715 resistance area, it is likely to aim for the 0.6750 round figure mark. A sustained move above this level could clear the way for a further up-move towards the 0.6800 handle. On the other hand, immediate support is pegged near the 0.6670-0.6650 region, which if broken decisively could accelerate the slide towards the 0.6600 mark.
The overall outlook for the AUD/USD pair remains mixed, with short-term technical indicators pointing to a potential up-move, while longer-term factors continue to weigh on the Aussie. The RBA’s hawkish stance and expectations for a pause in the Fed’s rate-hiking cycle may provide some support to the Australian currency, but ongoing concerns about global economic headwinds will likely cap any significant upside. In this environment, traders should remain cautious and monitor upcoming macroeconomic data releases and central bank decisions for further clues on the pair’s direction.
