AUD/USD retreats towards 0.6900 on recession woes, Aussie inflation, Fed in focus

• AUD/USD keeps pullback from five-week high, sidelined of late.
• Fears of economic slowdown, concerns surrounding China weigh on sentiment.
• Equities drop, yield curve inversion widened the most since 2000.
• Australia’s Q2 CPI, FOMC Meeting will be in focus for fresh impulse.

AUD/USD remains sidelined at around 0.6940 during the initial hours of Wednesday’s Asian session, after reversing from the monthly peak the previous day. The Aussie pair’s recent moves could be linked to the market’s risk-off mood amid recession concerns. Also weighing on the quote are the fears surrounding crucial consumer China, as well as the cautious mood ahead of important Q2 Consumer Price Index (CPI) data from Australia and the Federal Open Market Committee (FOMC) meeting.

Market’s fears of economic slowdown magnified after the International Monetary Fund (IMF) cut the global growth forecast once again this year, from 3.6% in their April review to 2.9%. The Washington-based organization also cut China’s 2022 GDP growth forecast to 3.3% from 4.4% in April by citing covid-19 lockdowns and the property sector crisis. It should be noted that the disappointing results from the global retailer Walmart also contributed to the recession fears.

Elsewhere, the US criticized Beijing’s approach to the South China Sea and renewed geopolitical tussles among the world’s top two economies. On the same line were chatters that Russia is up for shutting down gas supplies to Europe.

Talking about the data, the US CB Consumer Confidence fell for a third consecutive month in July, to 95.7 from 98.4 prior. Further, the US New Home Sales dropped to 0.59M for June versus 0.66M expected and 0.642M previous readout. On the same line, Richmond Fed Manufacturing Index rose to the highest level since April, to 0 from -13 expected and -9 prior (revised up from -11).

Amid these plays, equities closed in the red and the US Treasury yields remain mostly pressured. However, the difference between the 2-year and the 10-year bond coupons widened the most since the year 2000 and highlighted the rush towards risk-safety.

Moving on, Australia’s Q2 CPI, expected 1.8% versus 2.1% prior, will be crucial for the AUD/USD traders amid the Reserve Bank of Australia’s (RBA) readiness for heavier rate hikes. Following that, the Fed’s ability to convince markets of its ability to tame inflation and still keep the growth prospects intact will be crucial to watch. That said, the US central bank is expected to announce a 0.75% rate hike.

Also read: Australian CPI Preview: Why inflation is set to exceed estimates, and where AUD/USD could go

Technical analysis

Sustained trading below the 21-DMA level surrounding 0.6850 appears necessary for the AUD/USD bears to retake control. Alternatively, a downward sloping resistance line from mid-April, near 0.6950, precedes the monthly peak of 0.6983 to restrict short-term advances of the pair. That said, MACD and RSI (14) hint at the pair’s further upside.