AUD/USD rebounds from daily lows, stays in red near 0.7150

• Rising political tension between China and the U.S. weighs on AUD/USD.
• US Dollar Index stays in the negative territory on Tuesday.
• Coming up: Q4 inflation report from Australia.

After the Chinese Foreign Ministry in an official statement urged the United States to drop the arrest warrants on Huawei executives to "avoid going further down the wrong path," the AUD came under a bearish pressure and posted losses against its major rivals. Following a sharp drop to a daily low of 0.7138, however, the pair staged a recovery and turned flat in the early NA session at 0.7165 before losing its traction. At the moment, the pair is down 0.2% on the day at 0.7150

With the buck struggling to stage a decisive ahead of tomorrow's FOMC announcements, which could include a dovish shift regarding the balance sheet reduction scheme, the pair didn't have a difficult time limiting its losses on Tuesday. Ahead of Consumer Board's Consumer Sentiment report, the US Dollar Index is posting modest gains near 95.80.

Additionally, in an interview with Fox Business,  U.S. Treasury Secretary Steven Mnuchin said that he expected to see significant progress in this weeks trade talks with Chinese officials to provide an additional lift to the AUD. However, Mnuchin added that everything was still on the table including tariffs regarding the trade negotiations to cap any potential gains. 

In the early trading hours of the Asian session, the RBA and the Australian Bureau of Labor Statistics will publish their inflation data. Markets expect the annual CPI to ease to 1.7% in the fourth quarter from 1.9% in the third quarter. A higher-than-expected reading could help the AUD outperform its peers and vice versa.

Key technical levels

The pair could face the first support at 0.7145 (50-DMA) ahead of 0.7060 (Jan. 25 low) and 0.7000 (psychological level). On the upside, resistances align at 0.7170 (20-DMA), 0.7200 (psychological level/Jan. 28 high) and 0.7235 (Jan. 11 high).