AUD/USD rebounds to near 0.6950 despite US-China tensions, RBA policy buzz

• AUD/USD has rebounded firmly after dropping to near 0.6950 despite deepening US-China tensions.
• A surprise jump in the US NFP data has faded the expectations of a pause in the Federal Reserve’s policy tightening spell.
• To tame stubborn inflation, the Reserve Bank of Australia will escalate interest rates further.
• AUD/USD is aiming to test the breakdown of the Rising Channel pattern around 0.7000.

AUD/USD has attempted a firmer recovery after dropping to near the round-level support of 0.6900 in the early European session. The Aussie asset has scaled to near 0.6950 despite escalating tensions between the United States and China after the balloon event. A sudden attack ordered by US President Joe Bidden on a Chinese spy balloon, which has been recognized as civilian by the Chinese authorities has resulted in discomfort between the two nations.

The downside bias for the Aussie asset is solid amid escalating geopolitical tensions and rising expectations for further interest rate hike measures by the Federal Reserve (Fed). Also, the Australian Dollar could display some volatile moves ahead of the interest rate decision by the Reserve Bank of Australia (RBA).

S&P500 futures have escalated losses significantly in the Asian session, portraying a risk-off market mood.  The trimmed risk appetite of the market participants has pushed the return offered by the 10-year US Treasury bonds to near 3.55%.

Markets turn jittery as US-China tensions swell

Global equities turned jittery on Monday amid the impact of the US-China suspected spy Chinese balloon event this weekend. Stocks were dumped by the market participants as tensions between the two heavy-weight nations deepened. Chinese authorities condemned the decision of shooting down the Chinese balloon ordered by US President Joe Biden, which the former recognized as a civilian that accidentally entered into United States airspace, which was positioned for meteorological purposes.

The event has been followed by the postponement of the visit of US State of Secretary Antony Blinken to Beijing for which the former cited “nothing had been planned” by either side. This has spooked the market sentiment and therefore, investors have underpinned the risk-aversion theme.

It is worth noting that Australia is a leading trading partner of China and geopolitical tensions between the US and China could have a significant impact on the Australian Dollar.

A surprise rise in US NFP fades Fed pause bets

On Friday, the US Bureau of Labor Statistics reported a surprise jump in the number of payrolls added in an already tight labor market. According to the United States Nonfarm Payrolls (NFP) report, the economy has added fresh 517K, extremely higher than the consensus of 185K and the former release of 260K. The Unemployment Rate was trimmed to a multi-decade low of 3.4% lower than the expectations and the prior release of 3.6% and 3.5% respectively. Apart, from that Average Hourly Earnings dropped to 4.4% from 4.9% released earlier. A decline in earnings data might keep inflation projections in check as lower liquidity with households will not allow them to increase spending. However, a surprise rise in employment numbers could offset the impact of a decline in the labor cost index.

Markets were quite surprised as employment numbers soared despite a contraction in economic activities. The US manufacturing activities are contracting consecutively for the past three months amid higher interest rates by the Fed. Also, consumer spending has toned down recently.

Brace for a hawkish policy and guidance by the RBA

A historic jump in the Australian Consumer Price Index (CPI) (Q4) to 7.8% cleared that the inflation is extremely stubborn and an absence of a peak will bolster the case of further interest rate hikes by the Reserve Bank of Australia. Interest rate decision by the RBA is scheduled for February 8 and RBA Governor Philip Lowe is expected to stretch the Official Cash Rate (OCR) further to strengthen its defence in the battle against inflation.

Analyst at Deutsche Bank Australia sees the RBA likely to drive the Official Cash Rate (OCR) to 4.1%, citing the most recent inflation update of a 7.8% increase in the CPI, which was slightly higher than expected. “While the RBA will likely move more slowly in 2023 than it did in 2022, we now expect four more 25 basis point hikes this year: 25 basis points in each of February and March, and 25 basis points each at the May and August meetings” as reported by Forbes Advisor.

AUD/USD technical outlook

AUD/USD witnessed a sheer downside after a breakdown of the Rising Channel chart pattern on a four-hourly scale. The chart pattern showed a bearish reversal after an uptrend in a bounded territory. After a sheer fall, the Aussie asset has attempted a recovery and is likely to test the Rising Channel breakdown around the psychological resistance of 0.7000.

The 50-period Exponential Moving Average (EMA) at 0.7038 will act as a major barricade for the Aussie bulls.

Meanwhile, the Relative Strength Index (RSI) (14) is still oscillating in the bearish range of 20.00-40.00, demonstrating the activation of the bearish momentum.