AUD/USD pares intraday losses below 0.7200 on China inflation but yields test bulls

• AUD/USD challenges early Asian pullback from two-week top after strong China inflation data.
• China CPI rises the most since August 2020, PPI crosses market consensus in November.
• Sentiment sours amid fresh fears concerning Omicron, Fed rate hike.
• Yields stay firmer, S&P 500 Futures snap three-day rebound.

AUD/USD picks up bids to 0.7167, bouncing off intraday low, while consolidating the daily losses to 0.13% during early Thursday.

The Aussie pair’s latest rebound could be linked to the strong prints of the Consumer Price Index (CPI) and Producer Price Index (PPI) from Australia’s largest customer, China. However, the buyers remain cautious as the US Treasury yields stay firmer amid a risk-off mood.

China’s headline CPI jumped the most since August 2020, by 2.3% YoY and 0.4% MoM in November. The factory-gate inflation data also crossed 12.6% forecasts to arrive at 12.9% YoY in November.

Read: Chinese CPI rises at fastest pace since August 2020

Contrary to the China data, fresh fears of the South African coronavirus variant, dubbed at Omicron, join the chatters over the sooner rate hike by the US Federal Reserve (Fed) to weigh on the market sentiment, as well as the AUD/USD prices. The geopolitical tension surrounding the US, China, Iran and Russia are extra catalysts that roil the mood and underpin the US Treasury yields.

The re-introduction of the virus-led activity restrictions in Germany, France and the UK renews COVID-19 fears, reversing the previous optimism after major vaccine producers cited booster shots as effective to tame Omicron.

Further, the geopolitical tension among the world’s top two economies escalated as US Assistant Secretary of Defense for Indo-Pacific Security Affairs Ely Ratner said, “Bolstering Taiwan's self-defenses is an ‘urgent task’ and an essential feature of deterring China”. Also favoring the risk-off mood are the news suggesting the diplomatic tussles of the Washington-Tehran and the US-Russia.

It should be noted that the steady increase in the US inflation expectations and hawkish survey concerning the Fed rate hike by Reuters also propel the US Treasury yields and weigh on the AUD/USD prices.

Against this backdrop, the US 10-year Treasury yields rise 2.4 basis points (bps) to 1.53%, up for the fourth consecutive day, whereas S&P 500 Futures print mild losses to challenge the three-day uptrend.

Having witnessed the initial reaction of China inflation data, AUD/USD traders will pay attention to the risk catalysts, which in turn keeps sellers hopeful ahead of Friday’s US CPI release.

Technical analysis

Despite the latest pullback, AUD/USD prices remain above the previous key resistance confluence around 0.7100, comprising 50-SMA and descending trend line from late October. The same joins bullish MACD signals to keep the pair buyers hopeful of challenging the 0.7200 threshold.