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AUD sell off continues as risk sentiment sours

AUD - Australian Dollar

The Australian dollar tracked lower through trade on Tuesday weighed down by a shift in risk sentiment amplified by hawkish commentary from Federal Reserve policymakers. Having drifted sideways through the domestic session the AUD was forced below 0.72 US cents touching intraday lows at 0.7155. Investors appetite for risk evaporated after Fed member Charles Evans suggested the Fed could raise rates before inflation hit an average rate at 2%. The Fed has led markets to believe interest rates will be flat through the foreseeable future and Evans shift away from that narrative caught investors off guard, prompting a rush to adjust yield expectations. Risk sentiment continues to sour as uncertainty envelops financial markets. The positive markers investors have clung too through the last 3-4 months are faltering as hopes for a quick economic rebound fade in the face of reinstate restrictions and the likelihood of a US fiscal stimulus support package before the election diminishes. Having broken support at 0.7190/0.7200 the AUD is vulnerable to a further downward correction through the short term as sentiment continues to drive direction.

Key Movers

The US dollar outperformed again through trade on Tuesday, buoyed by renewed demand for haven assets and a correction in US interest rate expectations. A change in Feed narrative caught investors off guard through trade on Tuesday prompting a knee-jerk adjustment to yield expectations. The dollar index advanced some 0.4% testing a break above 94 and touching its highest level in over 8 weeks. Market sentiment has soured in recent weeks as a slew of negative headlines overwhelm investors. Expectations for a fiscal support package before the November election have all but evaporated as partisan bickering and ideological differences prevent Congress and the Senate from reaching an agreeable medium, while an uptick in COVID-19 infections in the last two weeks suggest the US are some way off a return to normal.

The Euro touched an 8-week low, falling through 1.17 while the Pound broke two-month lows following the introduction of new COVID-19 restrictions. Prime Minster Johnson has reinstated curfews on bars and restaurants and is encouraging Britons that can work from home to do so. The new round of restrictions are considered the bare minimum in a bid to combat a 2nd wave of infections. The Pound broke below 1.2750 to touch 1.2710 and appears poised to test a break toward 1.25 as we move toward the October Brexit deadline.

Attentions today turn to European and US manufacturing and service PMI’s and commentary for Fed Chair Jerome Powell. As positive sentiment unravels a run of negative prints could prompt a deeper risk off shift.

Expected Ranges

AUD/USD: 0.7080 - 0.7320 ▼

AUD/EUR: 0.6050 - 0.6180 ▼

GBP/AUD: 1.7620 - 1.7980 ▲

AUD/NZD: 1.0770 - 1.0850 ▼

AUD/CAD: 0.9430 - 0.9620 ▼