AUD/USD eyes upside to 0.6800 despite mild recovery by USD Index, neutral Fed bets remain solid

• AUD/USD is looking to reclaim 0.6800 despite the USD index has attempted a recovery.
• Investors are turning cautious ahead of the release of the US CPI data, however, the overall market mood is still positive.
• The Australian Dollar is showing resilience despite weaker demand in China.

The AUD/USD pair is aiming to reclaim the round-level resistance of 0.6800 in the European session. The Aussie asset is expected to continue to march higher despite a mild recovery in the US Dollar Index (DXY). The USD Index has witnessed some buying interest by investors below 103.30, however, more downside seems solid as a neutral interest rate policy by the Federal Reserve (Fed) is widely anticipated.

S&P500 futures have trimmed some gains added in London, portraying a minor decline in the risk appetite of the market participants. Investors are turning cautious ahead of the release of the United States Consumer Price Index (CPI) data, which will be announced on Tuesday, however, the overall market sentiment is still positive.

The USD Index is expected to remain extremely volatile as the street is majorly divided about the Fed’s policy guidance. One school of thought believes that the Fed should skip hiking rates this time as labor market conditions have started easing, US factory activities have been contracting straight for seven months, and the service sector is merely showing expansion. 

While another expression is in favor of more rate hikes as inflation in the US economy is more than twice the desired. Meanwhile, a resumption of interest rate hikes by the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) indicates that the battle against stubborn inflation is far from over. This could add some conviction for Fed policymakers to continue its policy-tightening further.

The Australian Dollar is showing resilience despite weaker demand in China. Lower interest rates by the People’s Bank of China (PBoC) and supportive fiscal policies are failing to push the overall growth back on track. China’s factory deflation is indicating a bleak domestic demand and no signs of recovery look appeared.

It is worth noting that Australia is the leading trading partner of China and weak economic prospects in China impact the Australian Dollar.