AUD/USD drops sharply towards 0.6600 as USD Index regains strength, RBA-Fed policy in focus

• AUD/USD has slipped sharply to near 0.6610 amid a sustained jump in the USD Index ahead of Fed policy.
• Pre-Fed policy anxiety is impacting the risk appetite of the market participants.
• Decelerates Australian PPI has strengthened the case of an unchanged interest rate policy.

The AUD/USD pair has displayed a steep fall after failing to extend recovery above 0.6640 in the Asian session. The Aussie asset has sensed selling pressure as investors have sifted funds into the US Dollar Index (DXY) amid anxiety ahead of the monetary policy decision by the Federal Reserve (Fed).

Correction in the S&P500 futures in the Asian session has extended as pre-Fed policy anxiety is impacting the risk appetite of the market participants. The USD Index has stretched its rebound move above the immediate resistance of 101.70. The demand for US government bonds has dropped sharply as one more interest rate hike from the Fed is widely anticipated. The 10-year US Treasury yields have jumped sharply to near 3.53%.

On Thursday, the USD Index defended its downside despite a sheer contraction in quarterly Gross Domestic Product (GDP) numbers. GDP (Q1) showed a decline to 1.1% vs. the former expansion of 2.6%. Businesses winded up inventories to offset consumer spending amid dismal economic outlook. However, it will provide firms an opportunity to start afresh with minimal inventory for the second quarter.

Meanwhile, the Australian Dollar is facing immense pressure as the Reserve Bank of Australia is expected to continue its neutral stance on interest rates. RBA Governor Philip Lowe kept its Official Cash Rate (OCR) unchanged at 3.60% considering the current scale of interest rate as restrictive enough to tame stubborn inflation.

Australia’s Producer Price Index (PPI) (Q1) has also decelerated heavily, strengthening the case for an unchanged interest rate policy. Quarterly PPI has accelerated by 1.0% at a slower pace than the forecast of 1.5% and the former release of 1.7%. Annual PPI has been trimmed to 5.2% from the estimates and the prior release of 5.8%.