AUD/USD recovers further from multi-month low ahead of US ISM PMI, RBA in focus

• AUD/USD reversed an intraday slide to over a three-month low touched earlier on Monday.
• The risk-on impulse acted as a headwind for the safe-haven USD and extended some support.
• The upside seems limited ahead of the RBA decision on Tuesday and FOMC on Wednesday.

The AUD/USD pair managed to recover nearly 50 pips from over a three-month low and climbed to a fresh daily peak, around the 0.7080 region during the first half of the European session.

Disappointing Chinese PMI prints released over the weekend fueled fears about a sharp slowdown in the world's second-largest economy and weighed on the China-proxy Australian dollar. This, along with some intraday US dollar buying, dragged the AUD/USD pair to its lowest level since March, though the intraday downtick stalled near the 0.7030 region.

A generally positive tone around the equity markets acted as a headwind for the safe-haven USD and benefitted the perceived riskier aussie. Apart from this, speculations that the Reserve Bank of Australia could lift the official target cash rate on Tuesday in the wake of last week's sharp rise in inflation extended support to the AUD/USD pair.

That said, any meaningful upside still seems elusive as investors might refrain from placing aggressive bets ahead of this week's key central banks event/data risks. The RBA is scheduled to announce its monetary policy decision during the Asian session on Tuesday. The market focus, however, will remain glued to the outcome of a two-day FOMC meeting.

The US central bank is universally expected to adopt a more aggressive policy response to curb soaring inflation and hike interest rates by 50 bps. Apart from this, investors will look for clues on the Fed's plan for balance sheet reduction and guidance on future interest rate hikes. This would act as a catalyst and have a significant effect on the global markets.

In the meantime, traders on Monday will take cues from the US economic docket, featuring the release of the US ISM Manufacturing PMI< due later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and produce some trading opportunities around the AUD/USD pair.

Technical levels to watch