AUD/USD drifts closer to 0.6500 with the focus turning to the US CPI release

• The Aussie Dollar drifts lower as optimism about the US-China deal wanes.
• A weak US Dollar is keeping the AUD from falling lower.
• Later today, the US CPI and a Treasury Bond auction will determine the USD's direction.

The Australian Dollar is trading lower on Wednesday, retracing Tuesday's gains as the frail enthusiasm about an alleged trade deal between the US and China faded, with markets turning cautious ahead of the release of US Inflation data.

US and China seem to have reached a deal to ease restrictions on rare metals' trade and reduce tariffs, but the parties have offered few details about the agreement, which grants little guarantee about its durability.

Markets reacted with moderate enthusiasm immediately after the news, but optimism faded soon. The Aussie Dollar went through a limited upside reaction before losing ground, returning to levels right above 0.6500 at the moment of writing.

A weak US Dollar keeps the Aussie afloat

The US Dollar, on the other hand, is pulling back from previous highs. The USD Index, which measures the value of the Dollar against the world's most traded currencies, has retreated below the 99.00 level after hitting 99.20 highs immediately after the trade deal.

Investors are growing increasingly cautious ahead of the US Consumer Price Index release. The monthly CPI is expected to have remained steady at 0.2%, with the yearly rate accelerating to 2.5% from the previous 2.3%. The Core CPI is seen increasing to 0.3% on the month and 2.9% year-on-year, from 0.2% and 2.8% respectively.

Beyond that, the US Treasury faces a $39 billion auction of 10-year Bonds, amid rising concerns about the country's fiscal health. A significant decline in demand from May's auction might increase bearish pressure on the USD.