AUD/USD plunges to 0.6500 on dismal sentiment, RBA’s neutral interest rate guidance

• AUD/USD falls sharply to 0.6500 on multiple headwinds.
• The RBA kept interest rates unchanged at 4.35% and delivered neutral guidance on interest rates.
• Investors await the Fed’s dot plot for fresh guidance on interest rates.

The AUD/USD pair faces an intense sell-off as downbeat market sentiment has weakened the appeal of risk-perceived assets. The Aussie asset falls to the psychological support of 0.6500 in Tuesday’s late European session as the US Dollar strengthens amid uncertainty ahead of the Federal Reserve’s (Fed) monetary policy decision, which will be announced on Wednesday.

S&P 500 futures have posted significant losses in the London session, portraying a decline in investors’ risk appetite. The US Dollar Index (DXY) continues its winning streak for the fourth trading session, rises to 104.00 amid upbeat safe-haven bid. 10-year US Treasury yields have come down slightly to 4.32%. Broadly, US bond yields exhibit strength as Fed rate cut expectations for the June policy meeting have dropped due to hot inflation data for February.

The Fed’s interest rate decision will guide the next move in the US Dollar. The CME FedWatch tool shows that the central bank will keep interest rates unchanged in the range of 5.25%-5.50% for the fifth time in a row. Therefore, investors will focus mainly on the release of the dot plot and economic projections. The dot plot, updated every quarter, shows interest rate projections from Fed officials for various timeframes.

Meanwhile, the Australian Dollar weakens as the Reserve Bank of Australia (RBA) delivers neutral guidance on the Official Cash rate (OCR) after keeping it unchanged at 4.35%. RBA Governor Michele Bullock said in his policy statement that a victory on inflation cannot be announced yet. The RBA needs to be more confident that inflation is coming down to consider a rate cut.