AUD/USD pares softer Australian CPI-inspired losses, focus remains on FOMC decision

• AUD/USD drops back closer to the overnight swing low, albeit lacks follow-through.
• The softer Australian CPI weighs heavily on the Aussie amid a modest USD strength.
• The risk-on mood helps limit the downside ahead of the crucial FOMC policy decision.

The AUD/USD pair comes under heavy selling pressure following the release of softer Australian consumer inflation figures on Wednesday, albeit manages to find support near the overnight swing low, around the 0.6730-0.6725 area. Spot prices recover nearly 35 pips from the daily trough and currently trade around the 0.6760-0.6765 region, down over 0.40% for the day.

The Australian Dollar (AUD) weakens across the board after the Australian Bureau of Statistics reported that the headline CPI rose 0.8% in the second quarter, lower than the 1% estimated and well below the 1.4% previous. Furthermore, the yearly rate also missed market expectations and decelerated from 7.0% to 6.2% during the reported period. Adding to this, the Reserve Bank of Australia's (RBA) preferred measure of trimmed-mean CPI grew by a 5.9% YoY rate in the June quarter, down from 6.6% the previous quarter. The data strengthens the case for the RBA to pause future rate hikes and weigh on the domestic currency, which, along with a modest US Dollar (USD) uptick, prompt aggressive selling around the AUD/USD pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, inches back closer to a two-week high touched on Tuesday and draws support from Tuesday's upbeat US macro data, which pointed to an extremely resilient economy. It is worth recalling that the survey from the Conference Board showed that US consumer confidence jumped to a two-year high in July in the wake of a persistently tight labour market and receding inflationary pressures. This raises optimism that the economy could skip a recession this year and lends some support to the Greenback. The USD bulls, however, refrain from placing fresh bets and prefer to wait for fresh cues about the Federal Reserve's (Fed) policy outlook.

The markets have been pricing out the possibility of any further interest rate hikes after the widely anticipated 25 bps lift-off at the end of a two-day FOMC monetary policy meeting this Wednesday. Investors, however, seem sceptic if the Fed will commit to a more dovish stance. Hence, the focus will remain glued to the accompanying monetary policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference, which will be scrutinized for the future rate-hike path. This, in turn, will influence the USD price dynamics and provide a fresh directional impetus to the AUD/USD pair.

In the meantime, the latest optimism led by hopes for more stimulus measures from China remains supportive of the underlying bullish sentiment around the global equity markets. This is seen as another factor capping gains for the safe-haven buck and lending some support to the risk-sensitive Aussie, making it prudent to wait for strong follow-through selling before placing fresh bearish bets around the AUD/USD pair.

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