AUD/USD extends downside to near 0.6770 as USD Index refreshes day high

• AUD/USD has slipped sharply to near 0.6770 due to further recovery in the USD Index.
• The risk profile is demonstrating caution ahead of Fed Powell’s testimony.
• The RBA might increase rates further in July considering the outcome of May’s very strong labor market data.

The AUD/USD pair has stretched its downside to near 0.6770 in the early New York session. The downside pressure in the Aussie asset is built-up by less-hawkish Reserve Bank of Australia (RBA) minutes and a recovery in the US Dollar Index (DXY).

S&P500 has opened on a negative note after an extended weekend due to the holiday on Monday on account of Juneteenth. The risk profile is demonstrating caution ahead of the Federal Reserve (Fed) chair Jerome Powell’s testimony.

The USD Index has printed a fresh day high at 102.62. The appeal for the USD Index has improved due to the risk-aversion theme. However, the US Treasury yields have extended their losses. The return offered on 10-year US Treasury bonds has dropped to near 3.76%.

Considering price action in the USD Index, it seems that investors are getting clarity ahead of Fed Powell’s testimony. Fed Powell is expected to deliver hawkish guidance as current inflation is double the desired rate and demand for durables is still solid despite higher interest obligations.

Meanwhile, less-hawkish RBA minutes have impacted the Australian Dollar. Analysts at ANZ Bank conveyed that minutes of the RBA described the rate rise decision was again described as “finely balanced”. Unlike previous minutes, there was no talk of whether further increases were needed. Ultimately the minutes had something for everyone – with talk of upside risks to inflation since May, but also optimism on productivity and unit labor costs from here. They further added increase in July is the most likely outcome given May’s very strong labor market data, which came out after the meeting.

Later this week, Australian Trade Balance data will be keenly watched.