AUD/USD recovers back above 0.7100, though still trading heavy as risk appetite remains ropey

• AUD/USD has managed to recover from earlier session lows in the 0.7080s to back above 0.7100.
• But the pair remains lower on the day amid risk-off due to Omicron worries, which will be a key driver this week.
• Traders will be watching the release of RBA minutes on Tuesday.

AUD/USD continues to trade on the back foot on the day, with the pair currently down about 0.2%, though has managed to bounce from earlier session lows in the 0.7080s back to the north of the 0.7100 level in recent trade. The 0.7100 area has been a decent zone of support over the last few weeks and a break below it this week could open the door to a run lower towards annual lows in the 0.7000 area.

Worries about the economic impact of the fast-spreading Omicron Covid-19 variant amid news of lockdowns in Europe (the Netherlands announced a full lockdown and other countries may follow suit) has been weighing on sentiment and commodity prices are decisively lower, which is a double whammy for the risk/commodity-sensitive Aussie. The theme of Omicron and lockdowns will remain the major driver of risk appetite for the remainder of the week (and year), amid thinned liquidity conditions owing to the proximity of Christmas and New Year holiday celebrations. Subsequently, there will be a lack of key macro data releases until the new year, though traders would do well to keep an eye on Tuesday’s RBA minutes and Thursday’s US Core PCE inflation data for November.

Regarding the former, traders are on notice for further hints from the RBA that it will pivot in a hawkish direction. It seems to be a fairly consensus view now that the bank will completely axe its QE programme in February in wake of last week’s much stronger than expected Australia November labour market report. The timing of rate hike is also a key theme, with markets expecting the RBA at some point to indicate that a first post-pandemic hike might come as soon as 2022 rather than the current 2023 guidance.

Regarding this week’s Core PCE inflation data, which is the Fed’s favoured guage of inflation faced by US consumers, should confirm that inflationary pressures rose in November, as the Consumer Price Inflation report indicated the week before last. One factor weighing on AUD/USD on Friday was hawkish remarks from Fed Board of Governors member Christopher Waller, who said that the March meeting was “live” for a first rate hike.