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AUD/USD tests major support again

This is the third time the Australian dollar has tested major support in the last two months as it has been pressured by rising US interest rates.

The Australian dollar fell on Monday, dropping to the significant support near 0.6680, losing more than half a percent on the day.

Geopolitical tensions rise again

China’s Foreign Ministry responded to US Vice President Joe Biden’s remarks on Taiwan on Monday by stating that Beijing “deplores and resolutely opposes this and has registered harsh complaints.”

We maintain the right to take all necessary actions, the Chinese Foreign Ministry continued. Late on Sunday, President Joe Biden of the United States stated, “In the case of a Chinese invasion, the US military would protect Taiwan.”

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In other news, per Reuters, China’s Premier Li Keqiang stated to the nation’s official media on Monday that the Chinese economy is still on the rise as a whole.

According to Li, China would expand its purchases of Vietnamese agricultural goods.On Tuesday, the RBA meeting minutes will be published, likely causing some volatility in the AUD/USD pair.

USD benefits

The dollar continues to profit from growing anticipation that the Fed would raise interest rates more quickly in order to control inflation. In addition, the existing risk-off climate supports the safe-haven dollar even more and helps divert flows away from the risk-sensitive Australian dollar.

Market attitude is still shaky due to concerns that sharply rising borrowing costs may cause a collapse of the world economy. Investors’ enthusiasm for perceived riskier assets is dampened by this, as well as challenges brought on by China’s zero-covid policy, the extended Russia-Ukraine war, and the deteriorating US-China relationship.

β€œThe aggressive tightening of policy in the coming 4-6 months, not just in the US but globally, increases the risk of a recession next year,” said Maria Landeborn, a senior strategist at Danske Bank A/S. β€œWe expect uncertainty will remain high surrounding inflation, rates, and the overall economy, which is negative for market sentiment and risk assets.”

Before the FOMC policy meeting, which will begin on Tuesday and last two days, volatility and liquidity may be lower. The US Federal Reserve is likely to raise interest rates by at least 75 basis points when it makes its announcement on Wednesday.

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Technically speaking, if the level at 0.6680 is broken down, large stop losses of long positions would be wiped out, likely sending the Aussie further lower in the initial reaction. The first stop for bears is anticipated at 0.66, with a medium-term target in the 0.65 area.

AUD/USD daily chart, Source: AuthorΒ΄s analysis, tradingview.com

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