A combination of supporting factors assisted AUD/USD to gain positive traction on Wednesday.
RBA rate hike bets, the risk-on impulse in the markets benefitted the perceived riskier aussie.
Hawkish Fed expectations acted as a tailwind for the USD and might cap gains ahead of FOMC.

The AUD/USD pair extended its steady intraday ascent and climbed to a fresh daily high, around the 0.7175 region heading into the North American session.

The pair attracted fresh buying on Wednesday and is now looking to build on this week’s recovery move from the 0.7090 support area, or a one-month low. The Australian dollar was underpinned by rising bets for an earlier interest rate hike by the Reserve Bank of Australia, boosted by Tuesday’s stronger domestic CPI report. Apart from this, a strong recovery in the global risk sentiment – as depicted by a generally positive tone around the equity markets – further benefitted the perceived riskier aussie.

On the other hand, the US dollar continued drawing support from expectations that the Fed will tighten its monetary policy at a faster pace than anticipated. In fact, investors now seem convinced about the prospects for an eventual Fed lift-off in March and have been pricing in a total of four rate hikes in 2022. This, in turn, might hold back traders from placing aggressive bullish bets and cap gains for the AUD/USD pair heading into the key event risk – the outcome of a two-day FOMC policy meeting.

The Fed is scheduled to announce its decision later during the US session and investors will look for clues about the likely timing of when the US central bank will commence its policy tightening cycle. This will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the AUD/USD pair. Apart from this, the broader market risk sentiment should further infuse some volatility across the FX markets during the latter part of the trading on Wednesday.

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