AUD/USD: Bear’s return eyes 0.7420 amid inflation-linked fears, China woes

• AUD/USD remains pressured after reversing from a three-month high.
• Fed tapering chatters, fears of higher inflation propelled US Treasury yields, RBA's Lowe cited inflation woes as well.
• China-led risk-off also underpins US dollar’s safe-haven demand.
• Preliminary PMIs for October are eyed for fresh impulse, risk catalysts are the key.

AUD/USD holds lower ground near 0.7460, following the U-turn from a multi-day high to end-up marking the heaviest daily fall in October. That said, the quote seesaws inside a choppy range as traders await fresh clues during early Friday morning in Asia.

The US Federal Reserve’s (Fed) “transitory” tag for inflation joins the European Central Bank’s (ECB) woes that the reflation wave is in for a strong run to renew rate hike calls and underpinned the Treasury yields, which in turn recalled the US dollar bulls. Also, sentiment-negative headlines from China weighed on the commodities and antipodeans, exerting an additional burden on the AUD/USD prices. 

Federal Reserve Governor Christopher Waller said on Thursday that the next few months will be critical to see whether inflation is transitory, as reported by Reuters. On the same line, European Central Bank (ECB) Governing Council member Ignazio Visco said on Thursday that supply bottlenecks are starting to weigh on the Italian economy and added that they could last for longer than expected, per Reuters. At home, the RBA Governor Philip Lowe also spoke for inflation fears as Reuters reports, "The Reserve Bank of Australia is closely watching a spike in inflation, with Governor Philip Lowe saying on Friday he did not think the rise would be sustained unless it led to sustainably higher wages growth."

Elsewhere, China’s Evergrande managed to get an extension on a defaulted $260 million bond but the global rating giant Fitch cites property stress from Beijing to join the macro policy trade-off risks. The troubled real-estate firm also failed to seal an asset sale deal with Hopson and flashed another red signal to the investors. Further, power cuts in China remain as the key problem for the world’s biggest industrial player even as the government restarts some of the coal mines to battles energy shortages.

Talking about data, Aussie NAB Business Confidence dropped to -1 from 17 in Q3 while US Philadelphia Fed Manufacturing Survey data also softened to 23.8 versus 25 expected and 30.7 prior. Additionally, US weekly Initial Jobless Claims weakened to 290K but the Existing Home Sales rose 7.0% versus a prior contraction of 2.0%.

Amid these plays, equity bulls stalled and the US 10-year Treasury yields jump to a fresh high since early April, helping the US Dollar Index (DXY) to snap a six-day downtrend despite renewing a three-week low earlier on Thursday.

Looking forward, headlines concerning inflation and China will be hot to direct short-term AUD/USD moves ahead of the preliminary activity numbers for October from the US. Should the PMIs arrive as stronger, the reflation fears can exert additional downside pressure on the quote.

Technical analysis

AUD/USD bulls got a rejection from a nearly seven-month-old horizontal resistance area surrounding 0.7530-35 amid overbought RSI conditions. The following weakness also broke multiple supports established since June near 0.7480-75. Even so, bears remain cautious until the quote stays beyond the monthly support line near 0.7420. Meanwhile, an upside clearance of 0.7535 will escalate the north-run towards late June’s peak of 0.7617.