• AUD/USD slumps below 0.6500 on cautious market mood.
• The Australian Dollar weakens as upside risks to China’s deflation deepen.
• The outlook for the Aussie asset weakens after an H&S breakdown.

The AUD/USD pair falls sharply below the psychological support of 0.6500 in the early New York session. The Aussie asset faces a sharp sell-off as investors turn anxious amid an absence of potential economic triggers.

The US Dollar Index (DXY) delivers a sharp recovery after consolidating near 104.00 as Federal Reserve (Fed) policymakers avoid speculating over the timing of rate cuts. Policymakers said they need more evidence indicating that inflation will sustainably return to the 2% target.

As per the CME Fedwatch tool, a rate-cut decision in March is unlikely. For May, chances in favor of a 25-basis point (bp) are stable at 54%.

Meanwhile, the Australian Dollar weakens against the US Dollar as upside risks to deflation in the Chinese economy have prompted the need for more stimulus from the People’s Bank of China (PBoC).

Annual consumer prices were deflated at a robust pace of 0.8% against expectations of 0.5% and the prior reading of 0.3%. Producers at factory gates slash prices at factory gates significantly due to poor aggregate demand. Being a proxy to China’s economy, the appeal for the Australian Dollar weakens.

AUD/USD witnesses a steep fall after a breakdown of the Head and Shoulder chart pattern formed on a daily time frame. The necklines of the aforementioned chart pattern is plotted from December 7 low at 0.6525. A bear cross, represented by the 20 and 50-day Exponential Moving Averages (EMAs) at 0.6625, indicates more weakness ahead.

The 14-period Relative Strength Index (RSI) has shifted into the bearish range of 20.00-40.00, which indicates momentum has leaned towards the downside.

Selling pressure would accelerate if the Aussie asset will drop below February 6 low of 0.6478, which will expose the asset to October 11 high at 0.6445. A downside move below the latter would drag the asset towards the round-level support of 0.6400