AUD/USD drops towards 0.6850 as risk-aversion underpins USD recovery, US ISM PMI eyed

• AUD/USD takes offers to refresh intraday low, pares the biggest daily gains in week.
• Improvements in Aussie PMI, escalating chatters over RBA’s another 50 bps rate hike fail to recall bulls.
• Inflation/recession fears weigh on market sentiment ahead of the key US activity data.

AUD/USD renews intraday low around 0.6880, reversing the previous day’s rebound from a fortnight trough, as sour sentiment weighs on the risk barometer pair during Friday’s Asian session.

In doing so, the Aussie pair ignores upbeat second readings of activity data for June and escalating calls for the Reserve Bank of Australia’s (RBA) aggressive rate hikes. The reason could be linked to the market’s economic pessimism amid rising inflation and recently downbeat data. The risk-off mood could be witnessed via the S&P 500 Futures as it drops for the fifth consecutive day to refresh the weekly low.

That said, the second reading of Australia’s S&P Global Manufacturing PMI for June rose past the initial forecasts of 55.8 to 56.2, versus the previous month’s final print of 55.7.

Elsewhere, Reuters’ latest poll mentioned that Australia's central bank (RBA) will deliver another half percentage-point interest rate hike on Tuesday as it fights to tame surging inflation, marking the first time it has ever raised the cash rate by that magnitude in consecutive meetings.

It should be noted that the US dollar’s rebound ahead of the key US ISM Manufacturing PMI for June, expected 55.0 versus 56.1 prior, exert downside pressure on the AUD/USD prices. That said, the US Dollar Index (DXY) reversed from a 12-day high to snap a two-day uptrend by closing Thursday’s trading around 104.75, near 104.80 by the press time.

The downbeat US personal spending and softer prints of the Fed’s preferred inflation gauge raised concerns over the health of the world’s largest economy and drowned the US dollar on Thursday. The greenback’s previous retreat could also be linked to the downbeat US Treasury yields as the benchmark 10-year bond coupons dropped below 3.0%, before bouncing off to 3.01% at the closing, to portray around 50 basis points (bps) of a fall from June’s peak.

Being the risk barometer, AUD/USD is likely to remain depressed amid the market’s sour sentiment. However, today’s US ISM PMI will be important to watch after the recently softer US data.

Also read: ISM Manufacturing PMI Preview: High inflation component steal the show, boost dollar

Technical analysis

AUD/USD bears again target a seven-week-old important support line, around 0.6860 by the press time. The corrective pullback, if any, needs to cross the fortnight-long resistance line near 0.6930 to convince buyers.