• AUD/USD drifts lower for the second straight day and drops to a fresh YTD low on Wednesday.
• Looming recession risks weigh on investors’ sentiment and undermine the risk-sensitive Aussie.
• Retreating US bond yields cap gains for the USD and lends support ahead of the FOMC minutes.

The AUD/USD pair remains under heavy selling pressure for the second successive day and drops to the 0.6560 area, its lowest level since November 2022 during the early North American session.

Worries over slowing global growth, particularly in China, along with the lack of progress in talks over increasing the US debt ceiling, continue to weigh on investors' sentiment and turn out to be a key factor weighing on the Australian Dollar (AUD). In fact, data from China last week indicated that the world's second-largest economy underperformed in April. Furthermore, Representatives of President Joe Biden and congressional Republicans ended another round of debt ceiling talks without an agreement to raise the government's  $31.4 trillion borrowing limit. This, along with speculations that the Reserve Bank of Australia (RBA) might refrain from hiking in June, exerts additional downward pressure on the perceived riskier Aussie.

The US Dollar (USD), on the other hand, consolidates its recent gains to a two-month low and remains well supported by firming expectations that the Federal Reserve (Fed) will keep interest rates higher for longer. In fact, the markets have started pricing in the possibility of another 25 bps lift-off at the next policy meeting in June and the bets were lifted by the recent hawkish remarks by a slew of influential Fed officials. That said, the ongoing retracement slide in the US Treasury bond yields is holding back the USD bulls from placing aggressive bets and helping limit the downside for the AUD/USD pair. Investors also seem reluctant and prefer to wait on the sidelines ahead of the release of the FOMC meeting minutes, due later during the US session.

The minutes will be closely scrutinized for clues about the Fed's future rate-hike path, which, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the AUD/USD pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the major is to the downside and any attempted recovery might still get sold into. Spot prices now seem vulnerable to weaken further towards testing the next relevant support near the 0.6500 psychological mark.

Technical levels to watch