AUD/USD keeps the red below mid-0.6900s amid modest USD strength, softer risk tone

• AUD/USD drifts into negative territory for the second straight day amid firmer USD.
• Rebounding US bond yields and a softer risk tone benefits the safe-haven greenback.
• Bets for smaller Fed rate hikes could act as a headwind for the buck and limit losses.

The AUD/USD pair attracts fresh selling following an early uptick to the 0.6975-0.6980 area and turns lower for the second successive day on Tuesday. Spot prices retreat further from the highest level since August 17 touched on Monday and drop to the 0.6930 region during the mid-European session.

A combination of factors assists the US Dollar to build on the previous day's recovery from a seven-month low, which, in turn, is exerting some downward pressure on the AUD/USD pair. A goodish intraday pickup in the US Treasury bond yields unpins the greenback. Apart from this, the prevalent cautious mood benefits the safe-haven buck and weighs on the risk-sensitive Aussie.

Investors remain concerned about a deeper global economic downturn amid the worst yet COVID-19 outbreak in China and the protracted Russia-Ukraine war. The fears were fueled by Tuesday's release of the Chinese GDP report, which showed that growth decelerated from the third quarter's reading of 3.9% to 2.9% during the October-December period - marking one of the worst levels in nearly half a century.

This, to a larger extent, overshadows the improving trend in Chinese Retail Sales and Industrial Production data, though fails to boost investors' confidence. That said, growing acceptance that the Fed will soften its hawkish stance amid signs of easing inflationary pressure might keep a lid on the US bond yields and the USD. This, in turn, should lend some support to the AUD/USD pair.

Furthermore, rising odds for an additional interest rate hike by the Reserve Bank of Australia (RBA) in February should help limit the downside for the AUD/USD pair, at least for the time being. This makes it prudent to wait for strong follow-through selling before confirming that spot prices have topped out in the near term and positioning for a deeper corrective pullback.

Market participants now look to the US economic docket, featuring the Empire State Manufacturing Index. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some impetus to the AUD/USD pair. The focus will then shift to the US Producer Price Index and Retail Sales data, due for release on Wednesday.

Technical levels to watch