AUD/USD sticks to gains above mid-0.7100s, lacks bullish conviction ahead of FOMC

• A combination of factors assisted AUD/USD to gain some positive traction on Wednesday.
• Stability in the equity markets, RBA rate hike bets benefitted the perceived riskier aussie.
• Investors, however, preferred to wait on the sidelines ahead of the crucial FOMC decision.

The AUD/USD pair traded with a positive bias heading into the European session and was last seen hovering near the daily high, around the 0.7160 region.

Following the previous day's good two-way price move, the AUD/USD pair regained positive traction on Wednesday and was supported by a combination of factors. Signs of stability in the global equity markets, along with expectations for an earlier interest rate hike by the Reserve Bank of Australia acted as a tailwind for the perceived riskier aussie.

Tuesday's stronger Australian CPI report fueled speculations that the RBA will scrap its bond-buying program at its upcoming meeting and open the door to rate rises this year. In fact, the headline CPI rose 1.3% in Q4, pushing the yearly rate to 3.5%. Adding to this, the core CPI surpassed the midpoint of the RBA's 2-3% target for the first time since June 2014.

On the other hand, the US dollar consolidated its recent gains to a two-week high and remained well supported by expectations that the Fed will tighten its policy at a faster pace than anticipated. The markets seem convinced that the US central bank would begin raising interest rates in March and have been pricing in a total of four hikes in 2022.

Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. Heading into the key event risk, investors might refrain from placing aggressive directional bets and prefer to wait on the sidelines. This, in turn, should keep a lid on any further gains for the AUD/USD pair.

Even from a technical perspective, the recent breakdown below an upward sloping trend-channel extending from the 2021 low warrants some caution for bullish traders. Hence, it will be prudent to wait for a strong follow-through buying before confirming that the AUD/USD pair has formed a strong base near the 0.7090 area and positioning for any meaningful upside.

Technical levels to watch