AUD/USD Outlook: Acceptance below 0.7100 would set the stage for further losses

• AUD/USD dropped to a one-week low on Monday and was pressured by a combination of factors.
• Bets for a 50 bps Fed rate hike in March, elevated US bond yields continued underpinning the USD.
• Geopolitical tensions also benefitted the safe-haven buck and weighed on the perceived riskier aussie.

The AUD/USD pair witnessed heavy intraday selling on Monday and dropped to a one-week low, though showed some resilience below the 0.7100 round-figure mark. A combination of factors provided a strong lift to the US dollar, which, in turn, contributed to the pair's early decline. The red-hot US consumer inflation figures released last week reinforced market expectations for a faster policy tightening by the Fed. This, along with a weaker risk tone amid fears around the Russia-Ukraine conflict, further benefitted the safe-haven greenback and weighed on the perceived riskier aussie.

The markets seem convinced that the Fed would adopt an aggressive policy response to combat high inflation and have been pricing in a 50 bps rate hike in March. The speculations were fueled by comments from St. Louis Fed President James Bullard, who reiterated calls for a faster pace of rate hikes. This, along with elevated US Treasury bond yields, acted as a tailwind for the USD. In fact, the yield on the benchmark 10-year US government bond shot back to 2%, closer to the highest level since mid-2019 touched last week in reaction to the hottest inflation reading in four decades.

Adding to this, worries over an imminent Russian invasion of Ukraine underpinned the buck. The US National Security Advisor Jake Sullivan warned on Friday that Russia could invade Ukraine before the end of the Winter Olympics in China on February 20. That said, Russia's Foreign Minister Sergey Lavrov eased worries and suggested continuing along the diplomatic path to extract security guarantees from the West. Lavrov told President Vladimir Putin that the United States had put forward concrete proposals on reducing military risks and that there was always a chance for agreement.

The latest development gave the market some comfort and led to a modest recovery in the risk sentiment, which, in turn, assisted the pair to rebound around 40 pips from the 0.7085 region. The attempted recovery got a minor lift during the Asian session on Tuesday following the release of the RBA monetary policy meeting, though lacked bullish conviction. The Australian central bank observed that inflation had picked up more quickly than expected, though reiterated that the Board is prepared to be patient as it monitors how the various factors affecting domestic inflation evolve.

Market participants now await the release of the US Producer Price Index (PPI) for January, due later during the North American session. Apart from this, the focus will be on the minutes of the FOMC January monetary policy meeting, scheduled for release on Wednesday. This might influence expectations about the Fed's next policy move and provide some meaningful impetus to the pair. Traders will further take cues from geopolitical developments, which will continue to play a key role in driving the broader market risk sentiment and producing trading opportunities.

Technical outlook

From a technical perspective, sustained weakness below the 0.7100-0.7090 area will suggest that a two-week-old uptrend has run its course and set the stage for further decline. The next relevant support is pegged near the post-NFP swing low, around the 0.7050 region, below which the pair could accelerate the fall towards the key 0.7000 psychological mark. The downward trajectory could further get extended and allow bearish traders to challenge the lowest level since June 2020, around the 0.6965 region touched on January 28.

On the flip side, momentum beyond the daily swing high, around the 0.7140 area, now seems to confront stiff resistance near the 0.7100 mark ahead of the 0.7200 mark. This is followed by a confluence barrier, comprising the 100-day SMA and a descending trend-line extending from October 2021, around the 0.7235 region. A convincing breakthrough will be seen as a fresh trigger for bullish traders and push the pair towards the 0.7300 mark en-route the January monthly swing high, around the 0.7315 region.