AUD/USD plummets back closer to YTD low, seems vulnerable amid resurgent USD demand

• A combination of factors prompts aggressive selling around AUD/USD on Tuesday.
• Weaker Chinese data and the RBA’s on-hold rate decision undermine the Aussie.
• The USD advances to over a three-month peak and contributes to the steep fall.

The AUD/USD pair comes under intense selling pressure on Tuesday and extends its steep intraday downfall through the first half of the European session. The momentum drags spot prices to the 0.6370 area, back closer to the YTD low touched in August, and is sponsored by a combination of factors.

The Australian Dollar (AUD) started weakening after a private survey showed that business activity in China's services sector expanded at its slowest pace in eight months. In fact, the Caixin/S&P Global Services PMI dropped from 54.1 to 51.8 in August, registering the lowest reading since December 2022 and reviving concerns about the worsening conditions in the world's second-largest economy. This, in turn, tempers investors' appetite for riskier assets, which, along with the Reserve Bank of Australia's (RBA) on-hold decision, prompt aggressive selling around the AUD/USD pair.

As was widely anticipated, the Australian central bank decided to stick to its wait-and-see stance and left the Official Cash Rate (OCR) unchanged at 4.10% for the third straight month. In the accompanying monetary policy statement, the RBA reiterated that some further tightening may still be needed to curb inflation, which remains on track to reach the 2-3% target range by mid-2025. The pause, along with the lack of fresh hawkish signals, fuels speculations that the policy tightening cycle might be over and does little to impress bullish traders or lend any support to the AUD/USD pair.

Tuesday's sharp decline could further be attributed to resurgent US Dollar (USD) demand, bolstered by growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer. Despite signs that labour market conditions in the US were easing, the markets are still pricing in the possibility of one more 25 bps Fed rate hike move by the end of this year. This, in turn, triggers a fresh leg up in the US Treasury bond yields and pushes the USD to over a three-month high, which further contributes to the heavily offered tone surrounding the AUD/USD pair.

Apart from the aforementioned fundamental factors, a sustained break through an ascending trend-line, extending from the YTD low, aggravates the bearish pressure. Moreover, acceptance below the 0.6400 round-figure mark could be seen as a fresh trigger for bearish traders and suggests that the path of least resistance for the AUD/USD pair is to the downside. That said, the extremely oversold Relative Strength Index (RSI) on hourly charts makes it prudent to wait for some intraday consolidation before traders start positioning for any further depreciating move.

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