AUD/USD extends recovery to near 0.6840 as investors digest hawkish Fed minutes

• AUD/USD has extended its recovery to near 0.6840 as investors have started ignoring the hawkish Fed minutes' impact.
• The upbeat market mood has resulted in a meaningful correction in the US Dollar Index to near 104.00.
• A decline in the Australian labor cost index might not impact the decision of policy tightening continuation by the RBA.

The AUD/USD pair has stretched its recovery to near 0.6840 in the Asian session. The Aussie asset has picked strength as investors have shrugged-off volatility inspired by the release of the hawkish Federal Open Market Committee (FOMC) minutes released in the late New York session.

A sheer recovery has been observed in the S&P500 futures after a choppy Wednesday, portraying a stellar rebound by the risk-appetite theme. The upbeat market mood has resulted in a meaningful correction in the US Dollar Index (DXY). The USD Index has slipped firmly to near 104.00 despite the Federal Reserve (Fed) policymakers in a hurry to reach the interest rate peak to bring down the inflationary pressures.

Fed chair Jerome Powell and his mates are worried that the strong labor market and a recovery in consumer spending could trigger a revival in the United States Consumer Price Index (CPI). The FOMC minutes conveyed that two policymakers Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard were not in favor of decelerating the pace of hiking rates again. Investors should be aware that the Fed also trimmed the policy tightening pace in December monetary policy meeting to 50 basis points (bps) after hiking interest rates four times consecutively by 75 bps.

Meanwhile, the absence of meaningful easing signals in the Australian inflation is bolstering the case of policy tightening continuation by the Reserve Bank of Australia (RBA). On Wednesday, Australia’s Wage Price Index (Q4) was escalated by 0.8% lower than the consensus of 1.0% on a quarterly basis. This might have provided relief to the RBA as lower funds with households would result in lower spending.  However, more rate hikes cannot be paused as the current inflation is four times more than the desired target.