- AUD/USD witnessed follow-through selling for the second successive day on the first day of a new week.
- Friday’s dovish remarks by RBA Governor Lowe, rising COVID-19 cases in China weighed on the aussie.
- The risk-on impulse acted as a headwind for the safe-haven USD and helped limit deeper losses, for now.
The AUD/USD pair remained depressed through the early European session and was last seen flirting with the two-week low, just below mid-0.7200s.
The pair extended last week's retracement slide from the vicinity of mid-0.7400s, or a near five-month high and witnessed some follow-through selling for the second successive day on Monday. Friday's dovish-sounding remarks by the Reserve Bank of Australia Governor Philip Lowe, along with the rise in COVID-19 cases in China turned out to be a key factor that weighed on the aussie.
It is worth recalling that RBA's Lowe said that the central bank will not be pressured by financial markets to raise interest rates until prices are rising at a sustainable pace. Moreover, China reported more than 3,100 locally transmitted coronavirus cases on Sunday or the highest in two years. This was seen as another factor that undermined the China-proxy Australian dollar.
On the other hand, renewed hopes for a diplomatic solution to end the war in Ukraine failed to assist the safe-haven US dollar to preserve its modest intraday gains. The latest optimism was fueled by comments by Ukrainian negotiator Mykhailo Podolyak, saying that Russia is beginning to talk constructively and that we will achieve some results in a matter of days.
Adding to this, a Russian delegate to the talks, Leonid Slutsky noted that they had made significant progress and that the delegations could soon reach draft agreements. This led to a goodish recovery in the equity markets, which extended some support to perceived riskier currencies and helped limit any deeper losses for the AUD/USD pair, at least for now.
It, however, remains to be seen if the pair is able to attract any buying at lower levels amid the underlying USD bullish sentiment, supported by elevated US Treasury bond yields. The recent monster gains in commodity prices have been fueling concerns about a major inflationary shock. This reaffirmed bets for an imminent policy tightening by the Fed and continued pushing the US bond yields higher.
Hence, the market focus now shifts to the two-day FOMC monetary policy meeting, starting this Tuesday. Apart from this, traders will take cues from fresh developments surrounding the Russia-Ukraine saga ahead of the RBA meeting minutes on Tuesday. In the meantime, the broader market risk sentiment, along with the US bond yields, might influence the USD and provide some impetus to the AUD/USD pair.
Technical levels to watch
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