AUD/USD lingers under 0.6700 mark as anticipation mounts for Fed decision

• AUD/USD hovers below 0.6700 mark, as market anticipates a 25 bps hike from Fed.
• Fed dueling priorities, inflation vs. banking turmoil?
• Market sentiment shifts as the investors weigh the possibility of a further rate hike. 

AUD/USD rebounded from Tuesday's low at 0.6650 as sentiment shifted and risk appetite increased. The pair remains in consolidation as traders await the Federal Reserve (Fed) policy decision.

Amid the ongoing banking turmoil, US authorities have sequentially introduced liquidity injection plans. The Fed has implemented the discount window and swap line to mitigate ongoing challenges, followed by strong support from US Treasury Secretary Janet Yellen.

Efforts by Janet Yellen to calm nerves seemed to be effective, as bank shares rallied on Tuesday. US government officials are also considering increasing the limit on deposit insurance for all small banks, despite opposition from some US senators.

Tuesday's price action could signal a change in investors' mood and potentially increase their appetite for another 25 basis point (bps) rate hike from the Fed.

Diminishing concerns about banking turmoil suggest that central banks can refocus on taming inflation, resulting in an increased probability of a 25 bps rate hike from the Fed. As the FOMC meeting approaches, this meeting will be particularly important. 

Two opposing forces are at play: one advocating for continued rate hikes until inflation is under control, and the other urging a pause amid worsening banking conditions. Observing the Fed's priority during this challenging situation will be crucial.

Traders should exercise extra caution heading into the FOMC meeting. Investors may interpret the Fed policy statement in various ways, and initial reactions could be reversed during Fed Chair Powell's press conferences.

Since the summary of economic projections was conducted before the banking turmoil, attention will be focused on the dot plots, forward guidance, and press conference. AUD/USD is likely to reflect the risk sentiment during the Fed policy decision.

Levels to watch