AUD/USD drops below 0.6710 as Fed to raise rates despite deepening slowdown fears

• AUD/USD has stretched its downside below 0.6710 amid a recovery in the USD Index.
• Fed policymakers are not ready to tone down their hawkish stance on interest rates despite slowdown fears.
• The Australian Dollar has faced immense pressure after mixed preliminary S&P PMI data.

The AUD/USD pair has extended its downside to near 0.6714 in the early London session. The Aussie asset is expected to move south further as the US Dollar Index (DXY) has shown a recovery move after building a base around 101.80.

The USD Index has scaled to near 101.86 and is expected to accelerate further. Investors are pouring funds into the USD Index amid a cautionary mood. S&P500 futures are flat in early Europe after three bearish trading sessions to dodge quarterly result season-inspired volatility. Meanwhile, the US Treasury yields are still struggling for recovery. The return provided on 10-year US Treasury yields is hovering around 3.52%.

The headline from a leaked US Intelligence report that China is building sophisticated cyber weapons to “seize control” of enemy satellites, rendering them useless for data signals or surveillance during wartime, as reported by Financial Times, has also increased appeal for the USD Index as a safe-haven.

Despite knowing the fact that United States manufacturing activities have been contracting for the past few months and labor market conditions have cool down further amid rising weekly jobless claims, Federal Reserve (Fed) policymakers are not ready to tone down their hawkish stance on interest rates.

Cleveland Federal Reserve President Loretta Mester reiterated on Thursday that the Fed has more work to do with inflation in the US staying too high, per Reuters. He further added, "Fed will need to hike policy rate to over 5% and hold there for a while."

The Australian Dollar is facing immense pressure after mixed preliminary S&P PMI (April) data. Manufacturing PMI softened heavily to 48.1 from the consensus of 48.8 and the former release of 49.1. While Services PMI jumped to 52.6 vs. the prior release of 50.7.