US Dollar May Score Key Break vs. Aussie as Market Mood Sours

US DOLLAR, YEN, STOCKS, HONG KONG, DIDI, FOMC, AUD/USD – TALKING POINTS:

• US Dollar and Japanese Yen rise as the mood darkens on Asia-Pacific markets
• China’s move against Didi, new Covid worries, Fed tightening are key concerns
• AUD/USD may set a course toward 0.71 as prices challenge support near 0.74

Financial markets were in a dour mood in Asia-Pacific trade. Regional stocks shed close to 0.5 percent on average while the anti-risk US Dollar, Japanese Yen and Swiss Franc rose against their G10 FX counterparts. Bellwether S&P 500 futures are pointing sharply lower, hinting that more of the same is ahead.

Shares in Hong Kong were especially hard-hit, with tech stalwarts Tencent and Alibaba leading the way lower APAC-wide. This extends a selloff triggered earlier in the week after the Cyberspace Administration of China launched a probe into Didi Chuxing, the country’s largest ride-hailing app.

Another viral Covid-19 wave probably added to the downbeat mood. Japan’s government signaled it is planning a new “state of emergency” declaration in Tokyo, even as the country prepares to host the Olympic Games. Meanwhile, South Korean daily case growth hit a new high.

Worries about sooner-than-expected Fed tightening seem to have contributed as well. The US Dollar briefly swung lower as minutes from June’s momentous FOMC meeting offered mixed signals, but the currency tellingly snapped back higher in a hurry to finish the day with an upside close.

This means markets may have ultimately judged that policymakers’ deepening concerns about inflation coupled with their broadly sanguine view of economic growth trends set the stage for sooner stimulus withdrawal (as expected). Fed Funds futures imply one hike next year and two more in 2023.

AUD/USD TECHNICAL ANALYSIS – ALL EYES ON 0.74 WITH SELLERS IN CONTROL

The familiar negative influence of a risk-off outbreak on the sentiment-sensitive Australian Dollar coupled with Fed-linked upward pressure on the US Dollar area weighing heavily on AUD/USD. Prices are probing through swing-low support at 0.7445, eyeing a pivotal test near the 0.74 figure.

A daily close under the 0.7384-0.7413 inflection zone may set the stage for prices to continue lower toward 0.7120. This is the implied downside objective of a now-completed Head and Shoulders (H&S) topping pattern carved out since the beginning of the year.

Signs of positive RSI divergence warning of waning bearish momentum may be a bit worrying for sellers. However, this may speak to recently slower progress downward compared with the mid-June plunge. Needless to say, this does not mean that a bullish reversal is necessarily imminent.

AUD/USD daily chart created with TradingView

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--- Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter