AUD/USD battles 100-DMA on the way to 0.7300 amid broad USD weakness

• AUD/USD bulls take a breather around two-month high, after rising the most since August.
• US Dollar slumped despite 40-year high inflation, US Treasury yields remain pressured, equities rallied before closing with mild gains.
• Fed’s Brainard said inflation is too high, WH Advisor Deese feared supply chain issues.
• No major data at home, Fedspeak will be in focus.

After portraying a roller coaster ride on Wednesday, AUD/USD seesaws around 0.7285-90, the two-month high during the early hours of Thursday’s Asian session. In doing so, the risk barometer pair reveals the buyer’s indecision over the previous day’s heavy run-up, the most since late August, amid a quiet start to the day’s trading.

Although softer yields and Fed Chair Powell’s Testimony helped AUD/USD bulls during early Wednesday’s trading, the real push to the north came after the US Consumer Price Index (CPI) release. It’s worth noting that the Aussie pair not only ignored multi-year high price pressure, which should have favored bears but also ignored downbeat China inflation data and virus woes.

That said, US CPI jumped to the highest levels since 1982 while matching 7.0% YoY forecasts, up from 6.8% previous readouts. The monthly figures rose to 0.5% versus 0.4% expected but softened below 0.8% prior. On the other hand, China's CPI eased to 1.5% YoY compared to 1.8% forecast and 2.3% prior while the MoM readings also dropped to -0.3% versus +0.2% expected and +0.4% previous readouts. Additionally, the factory-gate inflation, namely the Producer Price Index (PPI) also dropped to 10.3% YoY for December, below 11.1% expected and 12.9% prior.

Following that US inflation data, Federal Reserve Bank of St. Louis President James Bullard said, per Wall Street Journal (WSJ), “Four rate hikes in 2022 now appear to be on the table and, in the face of high inflation, a rate hike in March seems likely.” On the same line were comments from, Fed Board of Governors’ member and incoming Vice Chairman of the FOMC Lael Brainard who said, “Inflation control is Fed's most important task.

Despite the heavy inflation data, the US Dollar Index (DXY) slumped to the lowest levels since November 11, also marking the biggest daily loss in nearly seven weeks. Further, the US Treasury bond yields also marked a surprising extension of the previous weakness despite the strong inflation data and hawkish Fedspeak, which in turn propelled the Wall Street benchmark before the day-end pullback.

Recently, White House Economic Adviser Deese mentioned that supply chain issues are worse than expected, suggesting further inflation pressure.

In addition to the inflation fears and Fed’s readiness to act, worsening coronavirus conditions at home and aboard also should test the AUD/USD bulls. Australia reported the weekly high of covid cases, near 95,000, the previous day while shortages of the virus testing kits were revealed. Elsewhere, Tokyo is ready to raise the covid alert to the second-highest level, per NHK.

To sum up, the market’s reaction to the US inflation data and recently hawkish Fedspeak doesn’t fit the fundamentals and hence signal pullback moves. However, an absence of major data/events, except for the Fedspeak and weekly US jobless claims, can keep the buyers on board amid downbeat USD.

Technical analysis

A clear upside break of 50-DMA and a downward sloping resistance line from mid-November joins firmer RSI and bullish MACD signals to keep AUD/USD buyers hopeful. However, the 100-DMA surrounding 0.7290 challenges the Aussie pair’s further advances targeting the 61.8% Fibonacci retracement (Fibo.) of October-December downside near 0.7340.

Should the quote take a U-turn, a 50-DMA level of 0.7210 joins 38.2% Fibo. to put a floor under the prices. Though, a pullback towards the previous resistance line near 0.7260 can’t be ruled out.