AUD/USD struggles to gains any meaningful traction, consolidates above mid-0.6900s

• AUD/USD staged a goodish bounce from its lowest level since July 2020 touched earlier this Tuesday.
• The risk-on impulse, softer US Treasury bond yields undermined the USD and extended some support.
• Aggressive Fed rate hike bets and recession fears acted as a tailwind for the USD and capped the pair.

The AUD/USD pair witnessed good two-way price moves through the first half of the European session and was last seen trading in neutral territory, just above the mid-0.6900s.

Having dropped to its lowest level since July 2020, the AUD/USD pair staged an intraday recovery from the vicinity of the 0.6900 mark, though lacked any follow-through. The US dollar now seems to have entered a bullish consolidation phase amid a softer tone surrounding the US Treasury bond yields. Apart from this, strong recovery in the equity markets further undermined the safe-haven buck and extended some support to the perceived riskier aussie.

That said, the prospects for a more aggressive policy tightening by the Fed helped limit any deeper losses for the greenback. The markets seem convinced that the Fed would need to take more drastic action to combat stubbornly high inflation and have been pricing in a further 200 bps rate hike for the rest of 2022. Apart from this, growing market worries about softening global growth kept a lid on any further gains for the AUD/USD pair.

Tight supply chains resulting from China's zero COVID-19 policy, and rising oil and food prices due to the war in Ukraine, are causing inflationary fears. This, along with expectations for rapid rate hikes in the US, raised concerns about a possible recession. Hence, the market focus will remain on the US consumer inflation figures on Wednesday, which might influence the Fed's policy outlook and provide a fresh directional impetus to the AUD/USD pair.

In the meantime, the US bond yields will continue to play a key role in driving the USD demand amid absent relevant market moving economic releases. Traders might further take cues from the broader market risk sentiment to grab some short-term opportunities around the AUD/USD pair. Nevertheless, the bias remains tilted in favour of bearish traders and supports prospects for an extension of the recent bearish trend witnessed over the past one month or so.

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