AUD/USD pares early gains, turns flat below 0.7400

• AUD/USD lost its traction after climbing to 2-year highs above 0.7400.
• RBA kept its policy rate unchanged at 0.25% as expected.
• US Dollar Index stays below 92.00 ahead of key US PMI data.

The AUD/USD pair continued to push higher during the Asian trading hours on Tuesday and touched its highest level since August 2018 at 0.7414. Ahead of the American session, however, the pair has gone into a consolidation phase and was last seen trading flat on the day at 0.7375.

AUD pays no attention as RBA keeps status quo

Earlier in the day, the Reserve Bank of Australia (RBA) announced that it left its policy rate unchanged at an all-time low of 0.25% as expected. In its policy statement, the RBA reiterated that it will continue to undertake additional purchases of government bonds as necessary. Nevertheless, the AUD largely ignored the RBA's remarks and didn't show a significant reaction.

Assessing the RBA's policy announcements, “the RBA has effectively exhausted conventional monetary policy by cutting the OCR to its self-imposed floor of 0.25%," said Lee Sue Ann, Economist at UOB Group. "Hence, we do not see further reductions in the policy rate with negative rates ruled out by RBA Governor Phillip Lowe (for now).”

Meanwhile, the greenback continues to have a tough time finding demand as a safe-haven with the market sentiment remaining upbeat on coronavirus vaccine hopes.

Ahead of the IHS Markit's and the ISM's Manufacturing PMI data from the US, the US Dollar Index is down 0.3% on a daily basis at 91.90. Markets expect the PMI reports to show ongoing expansion in the manufacturing sector's economic activity. A surprising reading below 50 in either PMI data could trigger risk-aversion and help the USD start erasing its losses and weigh on the pair.

Technical levels to watch for