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  • The prevalent risk-off mood prompted some heavy selling around AUD/USD on Wednesday.
  • Inflation concerns, escalating conflict between Israel and Palestine dented the risk sentiment.
  • A subdued USD price action helped limit any further losses ahead of the critical US CPI report.

The AUD/USD pair managed to recover around 30 pips from weekly lows and was last seen trading comfortably above the 0.7800 mark, still over 0.30% for the day.

The pair witnessed some heavy selling during the first half of the trading action on Wednesday and extended this week’s retracement slide from the 0.7890 area, or the highest level since February 25. The aussie was weighed down by China’s decision last week to halt all high-level economic dialogue with Australia. The move pointed to strained relations between the two countries, which, along with the prevalent risk-off mood, drove flows away from the perceived riskier Australian dollar.

The global risk sentiment took a hit amid a dramatic escalation of conflict between Israel and Palestinian militant group, sparked by unrest at Jerusalem’s flashpoint Al-Aqsa Mosque compound. In fact, the two bitter enemies exchanged heavy fire on Tuesday, killing at least 35 Palestinians in Gaza. This comes on the back of worries that rising inflationary pressure might force the Fed to hike interest rates earlier than anticipated and further dented investors’ confidence.

Meanwhile, the global flight to the safety provided prompted some intraday short-covering move around the US dollar. That said, a softer tone surrounding the US Treasury bond yields kept a lid on the attempted USD recovery. This, in turn, helped limit any further losses, rather assisted the AUD/USD pair to attract some dip-buying at lower levels. The upside, however, is likely to remain limited ahead of Wednesday’s release of the critical US consumer inflation figures.

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