• AUD/USD edges lower on Tuesday and reverses a part of the previous day's strong move up.
• The disappointing Chinese PMI is seen weighing on the Aussie amid a modest USD uptick.
• The downside remains cushioned as traders keenly await the RBA monetary policy decision.

The AUD/USD pair struggles to capitalize on the previous day's rally of nearly 100 pips and remains below a technically significant 200-day Simple Moving Average (SMA) through the Asian session on Tuesday. Spot prices ticks lower in reaction to the weker Chinese data, though manage to defend the 0.6700 mark as traders seem reluctant ahead of the Reserve Bank of Australia (RBA) policy decision.

The markets have been pricing in a 22% probability of a 25 bps lift-off by the Australian central bank in August, though the latest Reuters poll showed a slight majority leaning in favor of a rate hike. The uncertainty holds back traders from placing aggressive directional bets around the AUD/USD pair and leads to subdued/range-bound price action. The upside, meanwhile, remains capped in the wake of a modest US Dollar (USD) uptick, which continues to draw support from bets for one more 25 bps rate hike by the Federal Reserve (Fed) in September or November.

It is worth recalling that Fed Chair Jerome Powell had said last week that the economy still needs to slow and the labour market to weaken for inflation to credibly return to the 2% target. Adding to this, the upbeat US GDP report pointed to an extremely resilient economy and supported prospects for further policy tightening by the US central bank. That said, signs of easing inflation might force the Fed to end its fastest interest rate hiking cycle since the 1980s. This, along with the prevalent risk-on mood, caps gains for the safe-haven buck and lends support to the AUD/USD pair.

Investors continue to cheer the latest optimism over more stimulus measures from China, which helps offset data showing that business activity in the world's second-largest economy deteriorated further in July. In fact, China's Caixin Manufacturing PMI dropped back in contraction territory during the reported month and came in at 49.2, down from 50.5 in the previous month and missing estimates for a reading of 50.3. Heading into the key central bank event risk, the aforementioned fundamental backdrop warrants caution before positioning for a firm intraday direction.

Technical levels to watch