AUD/USD plunges below 0.6700 as upbeat US Services PMI renews hawkish Fed bets fears

• AUD/USD has plunged below 0.6700 as the market mood has soured on upbeat US Services PMI data.
• A tight labor market and solid demand for services in the US indicate that short-term inflation is still de-anchored.
• The RBA is expected to announce a third consecutive 25 bps rate hike ahead.

The AUD/USD pair has witnessed an intense sell-off after refreshing its 11-week high at 0.6851 on Monday. The Aussie asset has plunged below the round-level support of 0.6700 in the early Asian session and is expected to remain on tenterhooks ahead of the interest rate decision by the Reserve Bank of Australia (RBA).

The risk profile turned extremely bearish on Monday after the US economy reported better-than-projected US ISM Services PMI data. This has renewed fears of a bigger rate hike announcement by the Federal Reserve (Fed) in its December monetary policy meeting.

The sour market mood improved safe-haven’s appeal dramatically. The US Dollar Index (DXY) recovered sharply to near 105.40 after registering a fresh five-month low near 104.10. S&P500 witnessed extreme selling pressure amid the risk aversion theme. Meanwhile, the 10-year US Treasury yields have recovered firmly to near 3.59%.

The US ISM Services PMI soared to 56.5, higher than the projections of 53.1 and the prior release of 54.4. Also, Friday’s Nonfarm Payrolls (NFP) were extremely stronger than projections, which indicated that the overall demand is robust and short-term inflation expectations are still de-anchored. This could ruin the plan of deceleration of interest rate hike pace by the Fed as expected for the monetary policy meeting scheduled for next week.

On the Australian front, investors are keeping an eye on RBA’s interest rate decision. RBA Governor Philip Lowe is expected to continue its 25 basis points (bps) rate hike culture for the third time consecutively despite signs of exhaustion in the inflationary pressures. This may push RBA’s Official Cash Rate (OCR) to 3.10%.