AUD/USD keeps the red below 0.6000 amid stronger USD, seems vulnerable near YTD low

• AUD/USD meets with a fresh supply on Monday and slides back closer to the YTD low.
• Aggressive Fed rate hike bets, the risk-off mood lifts the USD and exerts some pressure.
• The fundamental backdrop favours bearish traders ahead of the crucial FOMC meeting.

The AUD/USD pair struggles to capitalize on its modest intraday uptick and attracts fresh sellers near the 0.6000 psychological mark on Monday. The intraday descent extends through the mid-European session and drags spot prices to the 0.6675-0.6670 area, or its lowest level since June 2020 touched on Friday.

A combination of factors assists the US dollar to regain positive traction on the first day of a new week, which, in turn, is seen exerting pressure on the AUD/USD pair. Firming expectations that the Fed will hike interest rates at a faster pace to tame inflation continues to act as a tailwind for the greenback. Apart from this, the prevalent risk-off environment offers additional support to the safe-haven buck and contributes to driving flows away from the risk-sensitive aussie.

The market sentiment remains fragile amid worries that rapidly rising borrowing costs will lead to a deeper global economic downturn. This, along with headwinds stemming from China's zero-covid policy, the protracted Russia-Ukraine war and the deteriorating US-China relationship, tempers investors' appetite for perceived riskier assets. In fact, US President Joe Biden said the US will defend Taiwan in the event of an attack by China and triggers a fresh leg down in the equity markets.

The fundamental backdrop seems tilted firmly in favour of bearish traders and supports prospects for a further near-term depreciating move for the AUD/USD pair. Investors, however, might refrain from placing aggressive bets and prefer to move to the sidelines ahead of the two-day FOMC policy meeting, starting on Tuesday. The US central bank is scheduled to announce its decision on Wednesday and is universally expected to deliver at least a 75 bps interest rate increase.

The markets have also been pricing in a small chance of full 100 bps lift-off. Hence, the focus will be on the so-called dot-plot, which along with updated economic projections and Fed Chair Jerome Powell's remarks at the post-meeting press conference, might provide fresh clues about the US central bank's policy outlook. This, in turn, will play a key role in influencing the USD price dynamics and help determine the next leg of a directional move for the AUD/USD pair.

Technical levels to watch