AUD/USD rebounds from 0.6800 as USD Index drops sharply ahead of Fed Powell’s testimony

• AUD/USD has shown a recovery move from 0.6800 supported by a sell-off in the USD Index.
• S&P500 futures have recovered some losses, portraying an increment in the risk appetite of the market participants.
• Dovish PBoC interest rate policy has provided strength to the Australian Dollar.

The AUD/USD pair has found decent strength near the round-level support of 0.6800 in the London session. The Aussie asset has gained attention as the US Dollar Index (DXY) has witnessed an intense sell-off after facing barricades around 102.60.

S&P500 futures have recovered some losses, portraying an increment in the risk appetite of the market participants. On a broader note, the risk profile will remain precautionary as the US markets will open after an extended weekend.

The USD Index has faced immense selling pressure as investors are hoping that interest rates by the Federal Reserve (Fed) won’t move beyond 5.25-5.50%. As per the CME Fedwatch tool, more than 49% chances are in favor of only one small interest rate hike by the year-end. The context of only one interest rate hike this year is being supported by easing labor market conditions, and lower gasoline prices that have softened consumer and producer price index.

Going forward, the testimony from Fed chair Jerome Powell will be keenly watched.

Meanwhile, the Australian Dollar has gained traction as the People’s Bank of China (PBoC) has announced rate cuts. China’s central bank cuts its benchmark Loan Prime Rates (LPRs) by 10 basis points (bps) due to which the one-year LPR was reduced from 3.65% to 3.55% while the five-year LPR was trimmed to 4.20%.

It is worth noting that Australia is the leading trading partner of China and more monetary stimulus by the PBoC has strengthened the Australian Dollar.

Apart from that, the release of the Reserve Bank of Australia (RBA) minutes also propelled action in the Australian Dollar. Analysts at ANZ Bank cited the minutes of the RBA describes the rate rise decision was again described as “finely balanced”. Unlike previous minutes, there was no talk of whether further increases were needed. Ultimately the minutes had something for everyone – with talk of upside risks to inflation since May, but also optimism on productivity and unit labor costs from here. The further added increase in July is the most likely outcome given May’s very strong labor market data, which came out after the meeting.