AUD/USD dives to two-month low, around mid-0.7100s amid broad-based USD strength

• AUD/USD witnessed heavy selling for the third straight day and dropped to a two-month low.
• Aggressive Fed rate hike bets, the risk-off impulse underpinned the USD and exerted pressure.
• Oversold conditions on intraday charts warrant some caution before placing fresh bearish bets.

The AUD/USD pair continued losing ground through the early European session and dropped to a two-month low, around the 0.7150 region in the last hour.

The pair extended last week's bearish breakdown momentum through the very important 200-day SMA and witnessed heavy selling for the third successive day on Monday. Expectations for a more aggressive policy tightening by the Fed, along with the risk-off impulse, pushed the safe-haven US dollar to a more than two-year high. This, in turn, was seen as a key factor that continued exerting downward pressure on the AUD/USD pair.

The market bets that the US central bank would hike interest rates at a faster pace to combat high inflation were reaffirmed by Fed Chair Jerome Powell on Thursday. In fact, Powell said that a 50 bps hike will be on the table at the upcoming meeting in May and also hinted at a series of rate increases this year. The markets were quick to price in jumbo rate hikes at the next four scheduled meetings in May, June, July and September.

The prospects for rapid US interest rate hikes, along with prolonged COVID-19 lockdowns in China, have raised concerns about slowing global growth and tempered investors' appetite for riskier assets. This, in turn, boosted demand for traditional safe-haven assets, including the greenback. Apart from this, weaker iron ore prices further collaborate to drive flows away from the perceived riskier and the resources-linked aussie.

With the latest leg down, the AUD/USD pair has now retreated over 500 pips from the YTD peak, around the 0.7660 region touched earlier this April. The ongoing downward trajectory seems strong enough to drag spot prices further towards the 0.7100 round-figure mark. That said, extremely oversold conditions on intraday charts warrant some caution for bearish traders amid absent relevant market moving economic releases.

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