AUD/USD slides to two-month low, weakens further below 0.6600 amid risk-off impulse

The AUD/USD pair remains under some selling pressure for the second successive day on Wednesday and continues losing ground through the early European session. Spot prices drop to a near two-month low, around the 0.6575 region in the last hour, and seem vulnerable to prolonging the recent downward trajectory witnessed over the past three weeks or so.

The global risk sentiment takes a hit after Fitch unexpectedly downgraded the US Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA', citing fiscal deterioration over the next three years. This, along with China's economic woes and the Reserve Bank of Australia's (RBA) surprise decision to leave the Official Cash Rate (OCR) unchanged for the second straight meeting, weighs heavily on the Australian Dollar (AUD). Even a modest US Dollar (USD) weakness fails to impress bulls or lend any support to the AUD/USD pair.

The global flight to safety triggers a modest decline in the US Treasury bond yields and fails to assist the buck to capitalize on a two-week-old uptrend to its highest level since July 10 touched on Tuesday. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, so far, has struggled to make it through a technically significant 100-day Simple Moving Average (SMA) barrier. That said, rising bets for further policy tightening by the Federal Reserve (Fed) continue to act as a tailwind and help limit the intraday dip.

It is worth recalling that Fed Chair Jerome Powell had said that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. Moreover, the incoming US macro data points to an extremely resilient economy and keeps the door for another 25 bps lift-off in September or November wide open. This, along with a convincing break and acceptance below the 0.6600 round-figure mark, favours the AUD/USD bears and suggests that the path of least resistance for spot prices remains to the downside.

Market participants now look forward to the US ADP report on private-sector employment, due for release later during the early North American session. Apart from this, the US bond yields will influence the USD price dynamics and provide a fresh impetus to the AUD/USD pair. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the risk-sensitive Aussie. The focus, however, remains glued to the release of the crucial US monthly employment details, popularly known as the NFP report on Friday.

Technical levels to watch