AUD/USD aims to retest 0.6250 as risk-off profile rebounds ahead of Fed minutes

• AUD/USD is looking to test the 0.6250 cushion as the dismal market mood has rebounded.
• The DXY has recovered its losses after knee-jerk to near 112.50 ahead of Fed minutes.
• Fed policymaker's hawkish commentary has accelerated the odds of a 75 bps rate hike.

The AUD/USD pair has turned sideways in early Asia followed by a steep decline from around 0.6350 after a short-term risk-on mood faded. The asset is oscillating in a 0.6259-0.6280 range and is expected to retest the fresh two-year low at 0.6250 ahead. It indicates that the overall market mood is extremely negative and investors have capitalized on the pullback by adding shorts.

The late-night sell-off in the S&P500 after an intraday rebound has firmed up the negative market sentiment again. Apart from that, the US dollar index (DXY) has recovered to near 113.30 after a knee-jerk action. Meanwhile, the 10-year US Treasury yields are on the cusp of reclaiming the 4% hurdle.

Going forward, investors’ entire focus will be on the Federal Reserve (Fed) minutes, which are due on Wednesday. The minutes will provide detailed reasoning behind the announcement of the third consecutive 75 basis points (bps) rate hike by the Fed. Apart from that, projections over targeted terminal rate, inflation, and economic growth will be of utmost importance.

Meanwhile, hawkish commentary from Cleveland Fed President Loretta Mester that “we haven’t seen progress on inflation, we have seen some moderation- but to my mind, it means we still have to go a little bit further”, at Economic Club of New York, has accelerated odds of a fourth consecutive 75 bps rate hike in the first week of November. As per CME Fedwatch tool, chances for a 75 bps rate hike have improved to 77.7%.

On the Aussie front, Reserve Bank of Australia (RBA) Assistant Governor Luci Ellis has termed the neutral rate as a guide for policy, not a destination, which indicates that the targeted Official Cash Rate (OCR) at 3.85% by the central bank could be adjusted further. She further added that inflation expectations over one year will remain well anchored in a 2-3% range, at the Citi Australia and New Zealand Investment Conference.