AUD/USD flirts with daily low around 0.6600 on softer risk tone, downside seems limited

• AUD/USD kicks off the new week on a weaker note in reaction to mixed Chinese inflation figures.
• A softer risk tone also undermines the Aussie, though subdued USD demand lends some support.
• Traders might also prefer to wait on the sidelines ahead of the crucial US CPI report on Tuesday.

The AUD/USD pair extends Friday's retracement slide from the 0.6665-0.6670 region, or its highest level since mid-January and remains under some selling pressure on the first day of a new week. Spot prices remain on the defensive through the first half of the European session and currently trade just above the 0.6600 round-figure mark, though any meaningful corrective slide seems elusive.

Mixed Chinese inflation figures released over the weekend failed to ease concerns about deflation, which, along with US-Sino trade tensions, turn out to be key factors undermining the China-proxy Australian Dollar (AUD). In fact, China’s Consumer Price Index (CPI) rose for the first time in four months, while the Producer Price Index slipped by the 2.7% YoY rate during the reported month. Adding to this, Bloomberg reported that Washington is weighing sanctions on several Chinese tech companies, which, along with a generally weaker tone around the equity markets, undermines the risk-sensitive Aussie.

The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers or build on Friday's recovery from its lowest level since mid-February amid bets for an imminent shift in the Federal Reserve's (Fed) policy stance. Market participants now seem convinced that the US central bank will start cutting interest rates in June and the expectations were reaffirmed by a spike in the US jobless rate. This keeps the yield on the benchmark 10-year US government bond depressed near a more than one-month low, which keeps the USD bulls on the defensive and should lend some support to the AUD/USD pair.

Traders might also refrain from placing aggressive directional bets and prefer to wait on the sidelines ahead of the latest US consumer inflation figures, due for release on Tuesday. The crucial US CPI report will play a key role in influencing expectations about the Fed's rate-cut path, which, in turn, will drive the USD demand and provide some meaningful impetus to the AUD/USD pair. In the meantime, spot prices remain at the mercy of the USD price dynamics and the broader risk sentiment in the absence of any relevant market-moving economic releases from the US on Monday.