AUD/USD sticks to modest gains, remains below 0.7100 as traders await FOMC decision

• AUD/USD gains some follow-through traction on Wednesday amid a modest USD downtick.
• Bets for smaller rate hikes by the Fed continue to weigh on the buck and lend some support.
• The cautious market mood might cap gains for the risk-sensitive Aussie ahead of the FOMC.

The AUD/USD pair builds on the previous day's goodish rebound from the 0.6985 area, or over a one-week low and gains some follow-through traction on Wednesday. Spot prices climb to the 0.7075 region during the early European session, though any subsequent move up is more likely to remain capped ahead of the key central bank event risk.

The Federal Reserve (Fed) will announce its decision at the end of a two-day meeting on Wednesday and is expected to further moderate the pace of its rate-hiking cycle. Bets for a smaller 25 bps lift-off were cemented by the US wage growth data released on Tuesday, which showed that labor costs increased less than expected in the fourth quarter. The recent US macro data, however, point to a resilient economy and back the case for the Fed to stick to its hawkish stance for longer.

Hence, the focus will remain glued to the accompanying policy statement and Fed Chair Jerome Powell's comments at the post-meeting press conference. Investors will look for cues about the Fed's future rate-hike path, which will play a key role in influencing the US Dollar price dynamics and determining the near-term trajectory for the AUD/USD pair. In the meantime, a modest USD downtick is seen acting as a tailwind for the major and contributing to the intraday positive move.

That said, a softer risk tone - as depicted by a mildly negative sentiment around the equity markets - might hold back bulls from placing aggressive bets around the risk-sensitive Aussie. This makes it prudent to wait for a strong follow-through buying before confirming that the AUD/USD pair's pullback from the highest level since June 2022 has run its course. Traders now look to the US macro data - the ADP report, ISM Manufacturing PMI and JOLTS Job Openings - for some impetus.

Technical levels to watch