AUD/USD hangs near its lowest level since mid-July, focus shifts to RBA decision on Tuesday

• AUD/USD is seen oscillating in a narrow trading range below the 0.6800 mark on Monday.
• Bets for aggressive Fed rate hikes lift the USD to a two-decade high and act as a headwind.
• Relatively thin trading volumes limit the downside ahead of the RBA meeting on Tuesday.

The AUD/USD pair struggles to gain any meaningful traction on Monday and oscillates in a narrow trading band through the first half of the European session. The pair is currently placed around the 0.6780 region, just a few pips above its lowest level since mid-July touched on Friday.

The US dollar hits a fresh two-decade high on the first day of a new week and turns out to be a key factor acting as a headwind for the AUD/USD pair. Despite Friday's mixed US jobs report, expectations that the Fed will stick to its aggressive policy tightening path continue to underpin the greenback. In fact, the markets are pricing in a greater chance of a supersized 75 bps rate hike at the next FOMC meeting on September 20-21.

That said, the better-than-expected Chinese service sector activity report, along with signs of stability in the equity markets, offers some support to the risk-sensitive aussie. Apart from this, relatively thin liquidity conditions on the back of the Labor Day holiday in the US help limit the downside for the AUD/USD pair. Investors also seem reluctant ahead of the central bank event risk - the Reserve Bank of Australia (RBA) meeting.

The RBA is scheduled to announce its decision during the Asian session on Tuesday and is widely expected to continue to raise the cash rate gains. Investors, however, remain divided over the size of the rate hike. Hence, the focus will be on the accompanying monetary policy statement, which will be looked upon for clues if the Australian central bank will continue to normalise rates amid worries about a deeper global economic downturn.

This, in turn, will play a key role in influencing the Australian dollar and help determine the near-term trajectory for the AUD/USD pair. In the meantime, spot prices are more likely to prolong the range-bound price action. The fundamental backdrop, however, favours bearish traders, though a sustained break below the 0.6775-0.6770 support is needed to confirm the negative bias.

Technical levels to watch