AUD/USD: Pressured below 0.7800 on cautious sentiment ahead of Australia Q1 CPI, FOMC

• AUD/USD holds lower ground after declining the most in three days.
• Pre-Fed mood gains support from light calendar, virus woes in Asia and doubts over US stimulus.
• Aussie CPI may have recovered during Q1 despite snap lockdowns.
• Markets could stay sluggish with all eyes on FOMC.

Having snapped a two-day winning streak the previous day, AUD/USD remains depressed around 0.7765 amid the initial Asian session trading on Wednesday. Aussie traders’ return from a long weekend couldn’t get a warm welcome as markets turned before the key events. Also on the negative side were the mixed updates on the coronavirus (COVID-19) and vaccinations, as well as chatters surrounding the future of US President Joe Biden’s $2.25 trillion infrastructure spending bill.

Fed is greater than Aussie CPI but surprises are on the table…

Tuesday’s US Conference Board Consumer Confidence, up from 109.0 to 121.7, became evidence that the recovery in the world’s largest economy is in full swing. However, the figures couldn’t impress markets amid cautious mood before the US Federal Open Market Committee (FOMC) is up for a meeting on late Wednesday. The reason could be traced to the Fed’s commitment to back the easy money policy that doesn’t become an easy task this time, considering strong US data.

“Tomorrow we expect the Fed to stand pat, reiterate the need for patience, and to highlight that they will look through any near-term temporary inflation increases, and won’t hike until we see sustained strength in actual data. They may also lift the interest rate on excess reserves (IOER). While technical and operational, the risk is that it is misinterpreted by the market, potentially adding to FX volatility,” said the Australia and New Zealand Banking Group (ANZ) ahead of the event.

The Pre-FOMC mood isn’t the only catalysts that contribute to the AUD/USD weakness but hopes of a positive surprise from the Aussie Consumer Price Index (CPI) for the first quarter (Q1), expected 1.4% versus 0.9% prior, despite local lockdowns, also weigh on the quote.

Read: Australian Quarterly CPI Preview: A surprise lift in inflation on the cards

Further, the latest US Census data backed the Republicans’ hopes to regain the power in the Senate, which in turn will blur President Biden’s tax hike proposals and weigh on the mood. It should be noted that India’s worrisome covid figures, above 300K during the last six days, join the imbalance in the global vaccinations to test the market optimists.

Against this backdrop, Wall Street benchmarks were mostly unchanged while the US 10-year Treasury yield rose 5.5 basis points (bps) to 1.62% by the end of Tuesday’s North American session.

While AUD/USD prices seem to pave the way for a nearby consolidation of losses on upbeat Aussie CPI, the rush to risk-safety and cautious mood may compress the quote’s immediate moves ahead of the key FOMC.

Read: Federal Reserve Preview: Will Powell power up the dollar? Three things to watch out for

Technical analysis

Although failures to stay beyond the 0.7800 threshold portray AUD/USD weakness, a confluence of a two-week-old rising support line and 50-day SMA, around 0.7720, becomes a tough nut to crack for the pair sellers.