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AUD/USD recovers early lost ground to near 3-year lows

   •  Disappointing Chinese manufacturing PMI prompts some fresh selling.
   •  The USD remains on the defensive and helped limit further downside.

The AUD/USD pair has managed to reverse its early fall to near three-year lows and is currently placed in neutral territory, around the 0.7040 region. 

The pair met with some fresh supply on the first trading day of the year and dropped to test the key 0.7000 psychological mark for the first time since Feb. 2016 following the disappointing release of Chinese manufacturing data.

In fact, Caixin Chinese Manufacturing PMI fell into contraction territory for the first time since early May 2017 and turned out to be one of the key factors prompting some fresh selling around the China-proxy Australian Dollar.

However, expectations of a dovish Fed in 2019, coupled with partial US government shutdown kept the US Dollar bulls on the defensive and helped limit further downside, with the pair quickly rebounding around 40-pips from session lows.

Adding to this, renewed optimism over a possible resolution to the US-China trade dispute extended some additional support and remained supportive of the intraday recovery, though the prevalent risk-off mood might cap any meaningful up-move.

It, however, remains to be seen if the up-move is backed by any genuine buying, confirming that the pair might have already bottomed out in the near-term, or is solely led by some short-covering move, which runs the risk of being sold into at higher levels.

Technical levels to watch

Any subsequent up-move is likely to confront some fresh supply near the 0.7065-70 region, above which the pair is likely to aim towards reclaiming the 0.7100 handle. On the flip side, the 0.7010-0.7000 region might continue to act as an immediate support, which if broken might accelerate the fall further towards Feb. 2016 lows, around the 0.6975-70 region.

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