AUD/USD retreats towards two-year low under 0.6800, focus on recession, Fed Minutes

• AUD/USD fades corrective pullback from the lowest levels since June 2020.
• Risk profile remains weak amid economic slowdown fears, China’s mass testing renew covid woes.
• Fed Minutes flash risk of consolidation as Powell has disappointed markets of late.
• US ISM Services PMI for June, risk catalysts are also important for clear directions.

AUD/USD remains pressured around the 25-month, fading bounce off 0.6761 near 0.6790 amid Wednesday’s Asian session.

The Aussie pair refreshed its multi-day low as the market’s fear of economic slowdown amplified the previous day. Adding strength to the bearish bias were calls for China’s another round of lockdowns. In doing so, the risk barometer pair failed to cheer the Reserve Bank of Australia’s (RBA) 0.50% rate hike, which was widely anticipated.

Growing fears of global recession joined speculations that China may recall covid-led lockdowns to drown the AUD/USD prices the previous day. The pessimism intensified after Germany and Italy flashed economic warnings while the Bank of England (BOE) also released a report conveying the grim economic outlook. On the same line was China’s mass covid testing announcement.

At home, the RBA matched wide market expectations of announcing 50 basis points (bps) rate hike but couldn’t please the AUD/USD bulls. The quote’s weakness could be linked to the RBA statement saying, “In Australia, inflation is high, but not as high as in many other countries.”

While portraying the mood, the US Dollar Index (DXY) jumped to the highest levels in two years while equities dropped, before a mild recovery, whereas the US Treasury yields refreshed one-month low while inverting the yield curve between the two-year and 10-year coupons. The S&P 500 Futures, however, struggle for clear directions of late.

Looking forward, the Federal Open Market Committee (FOMC) Minutes and the US ISM Services PMI for June will be crucial for short-term market directions.

Also read: FOMC June Minutes Preview: Opportunity for dollar correction?

Technical analysis

A clear downside break of the two-month-old support line, now resistance around 0.6865, directs AUD/USD bears towards the late 2019 lows around 0.6670.