AUD/USD drops to over three-week low, eyes 0.6600 mark on softer Australian CPI

• AUD/USD comes under fresh selling pressure on Wednesday and dives to over a three-week low.
• The softer Australian CPI eases pressure on the RBA to hike rates further and weighs on the Aussie.
• A modest USD uptick and the worsening US-China relations also contribute to the ongoing downfall.

The AUD/USD pair meets with a fresh supply during the Asian session on Wednesday and dives to the 0.6620-0.6615 area, or over a three-week low in reaction to softer-than-expected Australian consumer inflation figures.

The Australian Bureau of Statistics reported that the headline CPI decelerated to the 5.6% YoY rate in May from 6.8% in the previous month. This eases expectations for further interest rate hikes by the Reserve Bank of Australia (RBA), which, along with worries about the worsening US-China relations, weigh on the Australian Dollar (AUD). In fact, the Wall Street Journal, citing people familiar with the matter, reported on Tuesday that the Biden administration is considering new restrictions on exports of artificial intelligence chips to China.

This, to a larger extent, overshadows the optimism led by Chinese Premier Li Qiang's remarks, saying economic growth in the second quarter will be higher than the first and is expected to reach the annual projected target of around 5%. Apart from this, a modest US Dollar (USD) uptick turns out to be another factor exerting some downward pressure on the AUD/USD pair and contributing to the ongoing downfall. Against the backdrop of the Federal Reserve's (Fed) hawkish outlook, Tuesday's upbeat US macro acts as a tailwind for the Greenback.

It is worth recalling that the Fed had signalled that borrowing may still need to rise as much as 50 bps by the end of this year. Furthermore, Fed Chair Jerome Powell said last week that the US central bank doesn't see rate cuts happening any time soon and is going to wait until it is confident that inflation is moving down to the 2% medium-term target. Hence, the market focus will remain glued to Powell's comments during a panel discussion at the ECB Forum on Central Banking in Sintra, due later this Wednesday and on Thursday.

Investors will look for fresh clues about the Fed's future rate-hike move, which, in turn, will play a key role in influencing the USD price dynamics and provide some meaningful impetus to the AUD/USD pair. The attention will then shift to the release of the Fed's preferred inflation gauge - the US Core PCE Price Index on Friday.

Technical levels to watch