AUD/USD recovers early lost ground to one-week low, turns flat around 0.7125-30 region

• AUD/USD attracted some dip-buying on Tuesday and reversed an early dip to sub-0.7100 levels.
• Signs of stability in the equity markets extended some support to the perceived riskier aussie.
• COVID-19 jitters should cap gains amid a modest USD strength ahead of the key FOMC decision.

The AUD/USD pair has managed to recover a major part of its intraday losses and was last seen trading just a few pips below the daily swing high, around the 0.7125-30 region.

The pair extended the previous day's retracement slide from the 0.7175-80 region, or a two-week high, and witnessed some selling during the early part of the trading on Tuesday. The intraday decline was sponsored by a combination of factors, though bulls showed some resilience below the 0.7100 round-figure mark.

Renewed concerns about the economic risks emerging from the spread of the Omicron variant continued weighing on investors' sentiment. This, along with a rise in daily coronavirus cases in Australia's largest state by population (New South Wales), undermined the perceived riskier aussie amid a modest US dollar strength.

The USD stood tall near a one-week high and remained supported by expectations that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation. In fact, the money markets indicate the possibility of an eventual liftoff by June 2022 and another hike as early as November.

The downside, however, remains cushioned as investors seemed reluctant to place aggressive bets and preferred to wait for the outcome of a two-day FOMC monetary policy meeting. Apart from this, signs of stability in the equity markets assisted the AUD/USD pair to attract some dip-buying near the 0.7090 region.

Market participants now look forward to the release of the US Producer Price Index, due later during the early North American session. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities around the AUD/USD pair ahead of the Chinese data dump on Wednesday.

Meanwhile, the focus will remain on the FOMC decision, scheduled to be announced on Wednesday. The Fed is widely expected to signal a faster wind-down of its monthly bond-buying program and move a step closer to raising rates. This, in turn, will drive the USD and determine the near-term trajectory for the AUD/USD pair.

Technical levels to watch