AUD/USD rebound pauses around 0.7150 with eyes on China inflation, Fed Minutes

• AUD/USD grinds higher after snapping three-day downtrend, bouncing off one-week low.
• Market sentiment improved on easing fears of Russian invasion.
• RBA Minutes conveyed policymakers’ caution while Aussie Treasury Secretary signaled tapering of fiscal support, US data came in mixed.
• China CPI, US Retail Sales and FOMC Minutes are the key data/events, risk catalysts are also important for clear direction.

AUD/USD treads water around mid-0.7100s during the early hours of Wednesday morning in Asia, after staging a notable rebound from a one-week low.

Having extended the risk-off during early Tuesday, amid escalating fears of a Russian invasion of Ukraine, the Aussie pair portrayed the recovery in market sentiment the previous day. The reason could be linked to headlines suggesting the retreat of some Russian troops from borders.

However, comments from Russian President Vladimir Putin and his US counterpart Joe Biden keep the geopolitical risk on the table and challenge the market’s optimism, despite getting lesser attention. That said, Russia’s Putin conveyed dissatisfaction with how negations are going over Ukraine’s NATO membership while US President Biden said, “Russian attack on Ukraine still very much a possibility.”

Elsewhere, RBA Minutes showed the policymakers’ hesitance in respecting the rate-hike concerns by citing the hopes of delay in economic recovery due to the covid. It should be noted that Australian Treasury Secretary Kennedy testified before the Australian parliament's Senate estimates committee and signaled tapering of fiscal support out of covid while saying, “Fiscal policy support has to be cut back, which will allow monetary policy to get back to more normal.” However, the diplomat also mentioned, “Premature tightening could prevent hitting full employment.”

On the other hand, the US Producer Price Index (PPI) data showed a hot factory-gate inflation figure supporting the Fed’s rate-hike concerns. That said, the PPI rose past 9.1% YoY expectations to 9.7%, versus upwardly revised 9.8% prior, in January whereas the Producer Price Index ex Food & Energy, also known as Core PPI, rallied to 8.3% versus 7.9% market consensus. Additionally, NY Empire State Manufacturing Index eased below 12.15 forecasts to 3.1, compared to -0.7 previous readouts.

Against this backdrop, the US 10-year Treasury yields rose 4.7 basis points (bps) to 2.043% whereas the Wall Street benchmarks also closed positive by the end of Tuesday’s North American session.

Moving on, AUD/USD traders will pay close attention to China’s headline inflation data for January, namely Consumer Price Index (CPI) and Producer Price Index (PPI), for immediate direction. Forecasts suggest the CPI will ease to 1.0% YoY from 1.5% whereas the PPI may drop to 9.5% versus 10.3% previous reading. Should the data matches downbeat expectations, AUD/USD may have a reason to consolidate recent gains. Though, major attention will be given to January Retail Sales from the US and Federal Open Market Committee (FOMC) Minutes amid chatters of a 0.50% rate lift in March.

Read: FOMC Minutes Preview: Dollar selling opportunity? Doves set for a comeback after hawkish meeting

Technical analysis

AUD/USD poses a recovery from the 38.2% Fibonacci retracement (Fibo.) of January 13-28 downturn, around 0.7100, with firmer MACD signals and steady RSI line signaling further advances.

However, the Aussie pair remains below the previous support line from January 28, suggesting the need for a 0.7185 break for the buyer’s conviction. Also acting as an immediate upside hurdle is the convergence of the 50-DMA and a descending trend line from January 20, close to 0.7170.