AUD/USD flat-lines above mid-0.6900s amid modest USD strength, cautious market mood

• AUD/USD retreats from a multi-month high touched on Monday, albeit lacks follow-through.
• A softer risk tone lifts the safe-haven USD and weighs on the risk-sensitive Australian Dollar.
• Bets for smaller Fed rate hikes cap the greenback and help limit the downside for the major.

The AUD/USD pair finds some support near the 0.6940 area and stalls its intraday retracement slide from the highest level since August 17 touched earlier this Monday. The pair is currently placed around the 0.6970 area, nearly unchanged for the day, and is influenced by the US Dollar price dynamics.

The USD Index, which measured the greenback's performance against a basket of currencies, stages a goodish rebound from a seven-month low and prompts some selling around the AUD/USD pair. A softer tone risk tone, amid worries about a deeper global economic downturn, benefits the safe-haven buck and drives flows away from the risk-sensitive Aussie. That said, speculations that the Fed may be nearing the end of its rate-hiking cycle keep a lid on any meaningful upside for the USD.

Investors now seem convinced that the US central bank will soften its hawkish stance amid signs of easing inflationary pressures. In fact, the latest US CPI report released last week showed that consumer prices fell in December for the first time in more than 2-1/2 years. This, in turn, lifted bets for a smaller 25 bps Fed rate hike move in February, which continues to act as a headwind for the buck and helps limit deeper corrective pullback for the AUD/USD pair, at least for now.

The Australian Dollar, on the other hand, draws support from rising odds for a further interest rate hike by the Reserve Bank of Australia (RBA) in February, bolstered by stronger domestic inflation figures released last week. This, in turn, makes it prudent to wait for strong follow-through selling before confirming that the AUD/USD pair has topped out in the near term. Traders now look forward to important Chinese macro data, due for release on Tuesday, for a fresh impetus.

Technical levels to watch