AUD/USD remains on the defensive, downside seems limited ahead of FOMC minutes

• Sustained USD buying, the risk-off impulse acted as a headwind for the perceived riskier aussie.
• The Fed’s hawkish outlook and surging US bond yields pushed the USD to a nearly two-year high.
• The Ukraine crisis lifted commodity prices and RBA’s upbeat commentary extended some support.

The AUD/USD pair remained on the defensive through the mid-European session, albeit has managed to hold its neck above the mid-0.7500s.

Following the previous day's sharp pullback from the 0.7660 area or the highest level since June 2021, the AUD/USD pair edged lower on Wednesday and was weighed down by a combination of factors. The market sentiment remains fragile amid fading hopes for a diplomatic solution to end the war in Ukraine. Apart from this, expectations for a faster policy tightening by the Fed took its toll on the global risk sentiment, which was evident from the risk-off impulse in the equity markets. This, in turn, lifted the safe-haven buck to a nearly two-year high and acted as a headwind for the major.

Investors seem convinced that the Fed would adopt a more aggressive policy stance and hike interest rates by 100 bps over the next two meetings. Moreover, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting. This, along with worries that more Western sanctions on Russia would further stoke inflation, pushed the US Treasury bond yields to a fresh multi-year peak. This continued underpinning the buck and exerted downward pressure on the AUD/USD pair, though the downside remains cushioned.

The uncertainty over Ukraine drove commodity prices higher, which, along with a more hawkish commentary by the Reserve Bank of Australia (RBA), extended some support to the resources-linked aussie. It is worth recalling that the RBA on Tuesday dropped its pledge to be patient on tightening policy and noted that the domestic economy remains resilient, and spending is picking up following the omicron setback. The markets quickly reacted and started pricing in the first-rate hike during the third quarter. This held back traders from placing bearish bets around the AUD/USD pair.

Investors also seemed reluctant and preferred to wait on the sidelines ahead of the FOMC monetary policy meeting minutes, due for release later during the US session. Investors will look for fresh clues about the Fed's policy outlook, which will drive the US bond yields and the USD price dynamics. Apart from this, traders will take cues from the incoming geopolitical headlines to grab some short-term opportunities around the AUD/USD pair.

Technical levels to watch