AUD/USD pulls back from YTD peak amid modest USD rally, trading around 0.6880 area

• AUD/USD pulls back after hitting 19-month high amid revival in USD demand.
• Global economic woes and geopolitical risks give the greenback a safe haven.
• Divergent Fed-RBA policy outlooks limit any significant slippage for the pair.

AUD/USD is struggling to find support above the 0.6900 round figure and is retreating slightly from the February 2023 high reached earlier this Wednesday. The intraday decline pulls spot prices towards the 0.6880-0.6875 region or a new daily low in the first half of the European session and is sponsored by a modest rise in the US dollar (USD).

Despite the latest optimism over China’s new stimulus measures, lingering concerns about a global economic downturn and lingering geopolitical risks are tempering investors’ appetite for riskier assets. This is evident from a weaker open in European equity markets, which is helping the safe-haven USD bounce back from the vicinity of YTD lows hit last week and taking away flows from the risk-sensitive Aussie. That said, a combination of factors should continue to act as a tailwind for the AUD/USD pair and help limit deeper losses.

Markets have priced in a higher chance that the Federal Reserve (Fed) will announce another 50 basis point (bps) rate cut in November. This marks a divergence from the dovish stance of the Reserve Bank of Australia (RBA) and should support the AUD/USD pair. In fact, the RBA reiterated on Tuesday that policy will need to be tight until confidence returns that inflation is moving sustainably towards target. Furthermore, RBA Governor Michele Bullock said recent data had not materially influenced the policy outlook.

Meanwhile, official data released earlier today showed Australia’s consumer price inflation (CPI) fell in August to the lowest level since the start of 2022, although the fall in core inflation was less pronounced. The data was not enough to justify a rate cut by the RBA in the near term, which in turn suggests that any further decline in the AUD/USD pair could still be seen as a buying opportunity and remains muted. Traders may also prefer to wait for Fed Chairman Jerome Powell’s speech on Thursday and the US PCE price index on Friday.