AUD/USD bounces off daily low, remains vulnerable amid stronger US CPI-inspired USD rally

• AUD/USD witnessed a dramatic turnaround from a two-week high touched earlier this Tuesday.
• The post-US CPI USD rally turns out to be a key factor exerting downward pressure on the pair.
• The risk-off impulse further contributes to driving flows away from the perceived riskier aussie.

The AUD/USD pair retreats over 135 pips from a two-week high touched earlier this Tuesday and dives to 0.6780-0.6775 area amid a strong pickup in the US dollar demand during the early North American session. Spot prices, however, manage to recover a few pips and move back above the 0.6800 mark.

The USD witnessed a dramatic intraday turnaround from the monthly low and strengthened across the board in reaction to stronger US consumer inflation figures. In fact, the headline CPI unexpectedly rose by 0.1% in August and the yearly rate eased to 8.3%, beating estimates for a decline to 8.1%.

Adding to this, the Core CPI, which excludes volatile food and energy prices, rose by 0.6% in August (0.3% anticipated) and climbed to 6.3% on yearly basis from 5.9% in July. The data revives bets for a more aggressive policy tightening by the Fed and provides a strong boost to the greenback.

The markets have now started pricing in the possibility of a jumbo 100 bps rate hike at the September FOMC meeting and another supersized 75 bps hike in November. This is reinforced by a sharp spike in the US Treasury bond yields, which, in turn, is seen as another factor underpinning the buck.

The prospects for faster rate hikes by the US central bank, along with recession fears, trigger a fresh wave of the risk-aversion trade. This is evident from a steep decline in the equity markets, which further contributes to driving flows away from the perceived riskier Australian dollar.

With the latest leg down, the AUD/USD pair reverses a major part of its gains recorded over the past two trading sessions. Furthermore, acceptance below the 0.6800 mark will set the stage for further depreciating move towards the 0.6740-0.6730 intermediate support en route to the 0.6700 round figure.

Technical levels to watch