AUD/USD stabilizes above 0.6500 as US Dollar edges down, China’s CPI in focus

• AUD/USD delivers a sustained move above 0.6500 amid a cheerful market mood.
• The USD Index corrects despite the Fed maintaining a restrictive interest rate stance.
• Going forward, China’s inflation data will guide the Australian dollar.

The AUD/USD pair climbs comfortably above the psychological resistance of 0.6500 in the late European session on Wednesday. The US Dollar Index (DXY) has edged down from an 11-week high of 104.50, although chances of an interest rate cut by the Federal Reserve (Fed) in March’s monetary policy meeting have been ruled out.

S&P500 futures have generated significant gains in the London session, portraying an improvement in the risk appetite of the market participants.

The US Dollar is facing significant pressure despite the Fed emphasizing keeping interest rates higher. Fed policymakers are not convinced that inflation will sustainably return to the 2% target.

Cleveland Federal Reserve Bank President Loretta Mester said on Tuesday deepening uncertainty over inflation is not allowing policymakers to comment about when the central bank will start reducing interest rates. Mester warned that interest rates could be restrictive for longer if price pressures appear to be stalling at a level or above our goal.

Meanwhile, investors await commentaries from Richmond Federal Reserve Bank Thomas Barkin and Federal Reserve Governor Michelle Bowman for further guidance.

On the Australian Dollar front, investors are shifting their focus on China’s Consumer Price Index (CPI) data for January, which will be published on Thursday. Investors anticipate that the Chinese economy was deflated by a higher pace of 0.5% against 0.3% in December. Being a proxy to China’s economic condition, the situation of deflation will weigh on the Australian Dollar.

This week, the Reserve Bank of Australia (RBA) kept its Official Cash Rate (OCR) unchanged at 4.35%, leaving doors open for further policy tightening.