AUD/USD hangs near one-week low, below 0.7200 amid stronger USD/risk-off

• A combination of factors dragged AUD/USD to a one-week low on Tuesday.
• Surging US bond yields acted as a tailwind for the USD and exerted pressure.
• The risk-off impulse also drove flows away from the perceived riskier aussie.

The AUD/USD pair maintained its offered tone through the first half of the European session and was last seen hovering near a one-week low, just below the 0.7200 mark.

Following the previous day's directionless price move, the AUD/USD pair met with a fresh supply on Tuesday and extended last week's retracement slide from a near two-month high, around the 0.7315 area. The downfall was sponsored by a broad-based US dollar strength, underpinned by a continual surge in the US Treasury bond yields.

In fact, the yield on the benchmark 10-year US government bond shot to the highest level since January 2022 amid growing acceptance that the Fed would start raising interest rates in March 2022. Moreover, the US 2-year notes, which are highly sensitive to rate hike expectations, surged past the 1.0% mark for the first time since February 2020.

Meanwhile, an extended sell-off in the US money markets tempered investors' appetite for riskier assets, which was evident from a turnaround in the equity markets. This further benefitted the safe-haven greenback and drove flows away from the perceived riskier aussie amid worries about a record high of COVID-19 deaths in Australia.

Investors, however, seem reluctant to place aggressive bearish bets and prefer to wait on the sidelines ahead of the upcoming FOMC policy meeting on January 25-26. The outcome will be looked upon for clearer signals about the likely timing when the Fed will be commencing its rate hike cycle and provide a fresh directional impetus to the AUD/USD pair.

In the meantime, traders on Tuesday will take cues from the release of the Empire State Manufacturing Index for some short-term opportunities later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, will influence the USD and produce some trading opportunities around the AUD/USD pair.

Technical levels to watch