AUD/USD drops below 0.7100 amid risk aversion
- AUD/USD extends correction into second straight day on Friday.
- US Dollar Index struggles to stage a meaningful recovery.
- Focus shifts to flash Manufacturing and Services PMI data from the US.
The AUD/USD pair lost more 40 pips and closed below 0.7100 on Thursday. With the escalating geopolitical tensions between the US and China, the pair remained under pressure during the first half of the day on Friday and dropped to a daily low of 0.7071. As of writing, the pair was down 0.28% on a daily basis at 0.7077.
US-China tensions weigh on AUD
As a retaliation to the US' decision to shut down China's consulate in Houston, China announced that it closed the US consulate in Chengdu, heightening fears over a US-China cold war. Reflecting the flight to safety, major Asian equity indexes suffered heavy losses and European stocks are losing more than 1%.
Meanwhile, the Commonwealth Bank's Manufacturing and Services PMI data improved to 53.4 and 58.5, respectively, in July but failed to provide a boost to the risk-sensitive AUD.
In the second half of the day, the IHS Markit will release the Services and Manufacturing PMI data from the US. Ahead of these data, the US Dollar Index is down 0.05% on the day at 94.73 as the greenback struggles to capitalize on risk-off flows amid slumping Treasury bond yields.
Even if Wall Street's main indexes stay under bearish pressure on Friday, the USD could have a difficult time finding demand until T-bond yields stage a decisive rebound and help the pair limit its losses.
Technical levels to watch for