AUD/USD tests territory below 0.6500 on dismal market mood, RBA policy eyed

• AUD/USD falls slightly below 0.6500 on risk-aversion mood.
• The USD Index rallies as upbeat US NFP dents Fed rate-cut hopes for March.
• The RBA is set to hold interest rates at 4.35% on Tuesday.

The AUD/USD pair has extended its downside slightly below the psychological support of 0.6500 in the European session on Monday. The Aussie asset faces a sell-off as the appeal for safe-haven assets has improved on easing Federal Reserve (Fed) rate-cut bets.

S&P500 futures have posted some losses in the European session, portraying a dismal market sentiment. The US Dollar Index (DXY) has printed a fresh two-month high near 104.20 as investors see the Fed keeping interest rates unchanged in the range of 5.25-5.50% longer than market participants had anticipated earlier.

The upbeat United States Nonfarm Payrolls (NFP) data for January released on Friday is the reasoning behind a sharp decline in bets supporting a rate cut in March. Labor demand and wage growth momentum were surprisingly strong and offered Fed policymakers a reason to argue in favor of restrictive interest rates until spring.

In today’s session, investors await the US ISM Services PMI for January, which will be published at 15:00 GMT. The economic data is seen improving to 52.0 from 50.6 in December.

Meanwhile, the Australian Dollar will dance to the tunes of the interest rate decision by the Reserve Bank of Australia (RBA), which will be announced on Tuesday. This will be the first monetary policy decision of 2024 in which the RBA is expected to keep the Official Cash Rate (OCR) unchanged at 4.35%, but the focus will remain on when it will start reducing interest rates.

Consistently easing price pressures in the Australian economy due to the deepening cost-of-living crisis leaves no room for RBA policymakers to raise interest rates further. Trimmed mean, a closed-watched measure for core inflation, grew at a slower pace of 4.2% in the last quarter of 2023 against a 5.2% increase in the July-September quarter.