The AUD/USD is hovering near a one-week low, below 0.7200, due to a stronger USD/risk-off environment.
A combination of factors dragged AUD/USD to a one-week low on Tuesday.
The AUD/USD pair remained offered during the first part of the European session, and was last seen lingering near a one-week low, just below the 0.7200 line.
Following the previous day’s directionless price movement, the AUD/USD pair saw new supply on Tuesday, extending last week’s retracement decline from a near two-month high, at 0.7315. The decline was fueled by broad-based US dollar strength, which was supported by a continuous rise in US Treasury bond yields.
Indeed, the yield on the benchmark 10-year US government bond has risen to its highest level since January 2022, reflecting rising consensus that the Fed will begin hiking interest rates in March 2022. Furthermore, the US 2-year note, which is extremely sensitive to rate hike forecasts, broke beyond the 1.0 % barrier for the first time since February 2020.
Meanwhile, a lengthy sell-off in US money markets dampened investors’ demand for riskier assets, as evidenced by a recovery in equity markets. This benefited the safe-haven greenback even more and drew flows away from the perceived riskier aussie amid concerns about a record high number of COVID-19 deaths in Australia.
Investors, on the other hand, appear hesitant to make big bearish wagers, preferring to sit on the sidelines ahead of the impending FOMC policy meeting on January 25-26. The outcome will be scrutinized for clearer signals regarding the expected timing of the Fed’s rate hike cycle, as well as to provide a new directional push to the AUD/USD pair.
Meanwhile, traders on Tuesday will look to the Empire State Manufacturing Index for any short-term chances later in the early North American session. This, together with US bond yields and overall market risk sentiment, will influence the USD and create some trading opportunities in the AUD/USD pair.