AUD/USD aims to reclaim 0.6980 as weak yields weigh USD Index

• AUD/USD is looking to recapture the critical resistance of 0.6980 as USD Index has dropped.
• Weaker US Treasury yields are weighing on the US Dollar Index.
• Morgan Stanley has revised the interest rate peak for the Fed at 5.25%.

The AUD/USD pair has turned sideways after a gradual upside move above 0.6960 in the early European session. The Aussie asset is struggling to extend gains amid an absence of a potential trigger for a power-pack action in the market.

S&P500 futures have recovered losses shown in the Asian session, but are struggling to add more gains ahead. The risk-taking ability of the market participants is not improving as recent commentary from US President Joe Biden over an altercation with China, while addressing the State of the Union (SOTU), has triggered caution. Broadly, the market mood seems extremely quiet.

The US Dollar Index (DXY) has remained extremely quiet at 103.00 but is showing signs of further weakness as US Treasury yields have accepted negative traction. The USD Index is expected to witness a sheer fall after surrendering the immediate support of 102.90. Meanwhile, the 10-year US Treasury yields have dropped to near 3.65%.

The commentary from Federal Reserve (Fed) chair Jerome Powell has completely vanished the odds of a pause in the policy tightening spell by the Fed. After a slowdown in December’s consumer spending data, economic activities, and the Producer Price Index (PPI) data, the street started betting that the Fed will avoid increasing interest rates further.

While January’s report of US Nonfarm Payrolls (NFP) has turned the table in the favor of a hawkish policy stance. The latest forecast from Morgan Stanley states 25 basis points (bps) rate hike expectation for the March meeting after a strong US jobs report on Friday, before conveying hopes of a 25 bps Fed rate hike in May following Powell’s speech.

The same brings Morgan Stanley’s expectation for the peak rate to 5.00% to 5.25% as per the latest forecasts.

Meanwhile, the Australian Dollar is also expecting further interest rate hikes by the Reserve Bank of Australia (RBA) as the Australian economy has not shown any meaningful signs of a decline in inflationary pressures.