AUD/USD drops to one-week low, further below 0.6900 mark amid risk-aversion

• AUD/USD continues to lose ground for the second successive day and dives to a one-week low.
• Recession fears weigh on investors' sentiment and drive flows away from the risk-sensitive Aussie.
• Bets for smaller Fed rate hikes continue to undermine the USD, albeit do little to lend support.

The AUD/USD pair extends the overnight sharp pullback from the 0.7060-0.7065 area, or its highest level since August 16 and remains under heavy selling pressure for the second straight day on Thursday. The downward trajectory remains uninterrupted through the mid-European session and drags spot prices to a one-week low, around the 0.6875 region in the last hour.

The prevalent risk-off environment - as depicted by a sea of red across the equity markets - is seen as a key factor driving flows away from the risk-sensitive Aussie. The weaker US macro data released on Wednesday comes on the back of concerns about economic headwinds stemming from the worst yet COVID-19 outbreak in China. This, in turn, fuels recession fears and take its toll on the global risk sentiment.

The AUD/USD bulls, meanwhile, fail to gain respite from a weaker US Dollar, which remains depressed amid expectations for a less aggressive policy tightening by the Fed. In fact, the markets now seem convinced that the US central bank will soften its stance and deliver a smaller 25 bps rate hike in February. This leads to a further decline in the US Treasury bond yields and undermines the greenback.

Thursday's downfall could further be attributed to some technical selling below the 0.6935 horizontal support. A subsequent break below the 0.6900 mark is seen as a fresh trigger for bearish traders and supports prospects for additional losses. Market participants now look forward to the US economic docket, which, along with the broader risk sentiment, should provide some impetus to the AUD/USD pair.

Technical levels to watch