AUD/USD retreats from two-month top near 0.7100, US Michigan Consumer Sentiment Index eyed

• AUD/USD bulls take a breather around 11-week top amid cautious optimism.
• Softer US PPI, Aussie CPI joined firmer equities to favor the pair buyers.
• Strong yields, fears of US-China tussles and the Fedspeak tested the upside momentum.
• Risk catalysts eyed for immediate directions amid a light calendar in Asia, US Michigan Consumer Sentiment Index is the key.

AUD/USD steps back from a two-month high, recently sidelined, as bulls seek fresh clues to extend the latest uptrend amid a light calendar and recently mixed mood during Friday’s Asian session. That said, the Aussie pair seesaws around 0.7100, after refreshing the multi-day high with 0.7137, during Friday’s initial Asian session.

US Producer Price Index (PPI) for July tracked the headline Consumer Price Index (CPI) while easing to 9.8% YoY versus 11.3% prior and 10.4% market forecasts, the data published by the US Bureau of Labor Statistics revealed on Thursday. That said, the monthly PPI dropped to the lowest levels since May 2020, to -0.5% compared to 1.0% expected and 0.2% prior, which in turn signaled more easing of inflation fears.

At home, Australia’s downbeat prints of Consumer Inflation Expectations for August, to 5.9% from 6.3%, offered additional relief to the Reserve Bank of Australia (RBA) that raised concerns over a surge in the prices of late.

In addition to the receding inflation woes, the softer prices of the US Weekly Jobless Claims also portrayed improvement in the employment scenario, tracking the recent job numbers from the world’s largest economy, which in turn helped to build the risk-on mood. That said, US Initial Jobless Claims eased to 262K for the week ending August 6 versus 263K expected and downwardly revised 248K prior.

Alternatively, comments from Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans challenged the market optimism earlier on Thursday. That said, Fed’s Kashkari mentioned that he hasn't "seen anything that changes" the need to raise the Fed's policy rate to 3.9% by year-end and to 4.4% by the end of 2023. Further, Fed policymaker Evens stated, “The economy is almost surely a little more fragile, but would take something adverse to trigger a recession.” Fed’s Evans also called inflation "unacceptably" high.

On the same line were the headlines surrounding China. Reuters relied on sources to mention that the saying US President Biden rethinks steps on China tariffs in wake of Taiwan response. Additionally, a jump in the coronavirus cases from China, to 700 new confirmed cases in the mainland on August 10 versus 444 a day earlier, also weighs on the pair. Furthermore, Taiwan’s criticism of the “One China” policy and US House Speaker Nancy Pelosi’s support for Taipei also challenged the market optimism.

Amid these plays, Wall Street began the day on a positive side before closing mixed while the US 10-year Treasury yields rallied 10 basis points (bps) to 2.88% at the latest.

Looking forward, a light calendar at home requires the AUD/USD traders to keep their eyes on the qualitative catalysts for fresh directions ahead of the US Michigan Consumer Sentiment Index (CSI) for August, expected at 52.5 versus 51.5 prior.

Technical analysis

An upwards loping support line from early July, around 0.7090, restricts the immediate downside of the AUD/USD pair. The fresh upside momentum, however, needs validation from 0.7140.