AUD/USD holds above 0.6500 amid holiday-thinned trade

• AUD/USD trades on a weaker note around 0.6520 amid light trading volume.
• Fed officials emphasized that further evidence of progress on inflation is needed before cutting rates.
• RBA’s Bullock stated that the board hasn’t ruled out a further hike in the coming months.
• The January CPI inflation data on Tuesday will be a closely watched event.

The AUD/USD pair remains on the defensive during the early Asian session on Monday. The markets are closed in China for the Lunar New Year holidays. Amid the quiet session in Asia, traders will focus on the risk sentiment in the new week. Later this week, the US Consumer Price Index (CPI) for January will be due. At press time, AUD/USD is trading at 0.6520, losing 0.07% on the day. 

The revised CPI figures rose by 0.2% in December from the previous month, compared to the initial estimate of 0.3%, according to the Bureau of Labor Statistics on Friday. The report indicated inflation climbed in December 2022 and did not fall as previously thought.

Several Federal Reserve (Fed) officials emphasized last week that further evidence of progress on inflation is needed before cutting rates. The January CPI data on Tuesday will be key data, which is projected to show an increase of 0.2% MoM and 3.0% YoY. The Core CPI excludes volatile food and energy prices and is estimated to show an increase of 0.3% MoM and 3.8% YoY. Fed Funds futures have priced in 107 basis points (bps) or about 1% in rate cuts for 2024, down from 158 bps less than a month ago.

On the Aussie front, the Reserve Bank of Australia (RBA) delivered more hawkish bias than the market expected. RBA governor Michele Bullock said on Friday that the board hasn’t ruled out a further increase in interest rates but neither has it ruled it in. Additionally, the concern about deflation in China weighs on sentiment, which might drag the Australian Dollar (AUD) lower and act as a headwind for the AUD/USD pair. 

The market is likely to trade in light trading volume due to the Lunar New Year holidays. Apart from the release of CPI inflation data on Tuesday, investors will keep an eye on multiple Fed speakers this week. These events could give a clear direction for the AUD/USD pair.