AUD/USD extends correction to near 0.6820 amid quiet market mood, Fed policy eyed

• AUD/USD has slipped further to near 0.6820 ahead of Fed’s policy meeting.
• The FOMC is expected to hike its interest rate by 50 bps on a second consecutive decline in the annual inflation rate.
• Australian consumer inflation expectations for 12-month period are seen lower at 5.7%.

The AUD/USD pair has extended its correction to near 0.6820 in the Asian session. The Aussie asset is declining continuously after failing to conquer the critical resistance of 0.6900 on Tuesday. Soft United States Consumer Price Index (CPI) data brought a juggernaut rally in the Australian Dollar, however, the latter failed to keep the same.

S&P500 futures have extended their gains in Tokyo session as a slowdown in the price rise index has faded deepening recession fears ahead. The US equities are expected to display a strong run-up as a consecutive decline in inflation has set the ground for a smaller interest rate hike by the Federal Reserve (Fed).

The US Dollar Index (DXY) is holding itself above 104.00 amid a quiet market mood. The USD Index is expected to remain on tenterhooks as a downward shift in the approach of Fed chair Jerome Powell for interest rates may trim safe-haven appeal further. Meanwhile, the 10-year US Treasury yields have dropped further below 3.50% amid a significant improvement in demand for US Treasury bonds.

A significant drop in US inflation is backed by a decline in the cost of gasoline, used cars, and airline fares. The headline inflation dropped to 7.1% while the core CPI that excludes oil and food prices drop to 6.0%.

A soft inflation report has cemented a decline in the interest rate hike pace by the Fed. Analysts at Commerzbank see a rate hike by 50 basis points (bps) in December Federal Open Market Committee (FOMC) meeting. For guidance, “We continue to assume that the Fed will reduce the size of the rate hikes again at the beginning of 2023, moving by only 25 bps in February and March.”

On the Aussie front, investors are awaiting the release of the Employment data. The Employment Change is seen at 19K, lower than the prior release of 32.2K. Apart from that, investors will focus on 12-month consumer inflation expectations, which are expected to decline to 5.7% vs. 6.0% in the prior release.