AUD/USD struggles near one-week low around 0.7000 amid softer risk tone, USD strength

The AUD/USD pair remains under heavy selling pressure for the second straight day on Tuesday and drops to over a one-week low heading into the North American session. The pair is currently placed around the 0.7000 psychological mark and seems vulnerable to prolonging its recent pullback from the highest level since June 2022 touched last week.

The Australian Dollar weakens across the board in reaction to the dismal domestic macro data, which showed that Retail Sales slumped 3.9% in December amid the persistent rise in prices. Furthermore, investors are increasingly pessimistic about the economic outlook amid expectations that additional rate hikes by the Reserve Bank of Australia (RBA) will contribute to the cost of living crisis. This, along with a modest US Dollar strength, exerts downward pressure on the AUD/USD pair.

The worst COVID-19 outbreak in China raises uncertainty about a strong recovery in the world's second-largest economy and continues to weigh on investors' sentiment. This is evident from a generally weaker tone around the equity markets, which is driving some haven flows towards the buck and weighing on the risk-sensitive Aussie. The USD uptick could also be attributed to some repositioning trade ahead of the highly-anticipated FOMC monetary policy decision, due to be announced on Wednesday.

The Fed is expected to further slow the pace of its policy-tightening cycle and deliver a smaller 25 bps rate hike. The recent US macro data, however, point to an economy that is resilient despite the rapidly rising borrowing costs and backs the case for the Fed to stick to its hawkish stance for longer. This, in turn, prompts traders to lighten their USD bearish positions, though a downtick in the US Treasury bond yields keeps a lid on any meaningful upside, at least for now.

Heading into the key central bank event risk, traders on Tuesday will take cues from the US economic docket, featuring the Chicago PMI and the Conference Board's Consumer Confidence Index. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and provide some impetus to the AUD/USD pair.

Technical levels to watch