AUD/USD trades with modest intraday gains above 0.6900, lacks bullish conviction

• AUD/USD gains some positive traction on Friday, though lacks follow-through.
• The USD benefits from rebounding US bond yields and caps gains for the pair.
• A mildly positive risk tone might act as a tailwind for the risk-sensitive Aussie.

The AUD/USD pair edges higher during the Asian session on Friday and recovers further from over a one-week low, around the 0.6870 region touched the previous day. The pair, however, trims a part of its modest intraday gains and is currently placed around the 0.6920-0.6915 area, up less than 0.15% for the day.

The US Treasury bond yields build on the overnight recovery from a four-month low and lend some support to the US Dollar, which, in turn, acts as a headwind for the AUD/USD pair. The upbeat US macro data released on Thursday, along with fresh hawkish rhetoric from Fed officials, is seen pushing the US Treasury bond yields higher and underpinning the greenback.

The markets, however, continue to price in a greater chance of a smaller 25 bps Fed rate hike in February. This should keep a lid on any meaningful upside for the US bond yields and the USD. Apart from this, a generally positive tone around the Asian equity markets could benefit the risk-sensitive Aussie and help limit the downside for the AUD/USD pair.

Investors turn optimistic over a recovery in the world's second-largest economy after China kept its key lending rates at historic lows for a fifth straight month. The move indicates that the government plans to keep liquidity conditions loose in order to spur an economic recovery. This might hold back traders from placing bearish bets around the AUD/USD pair.

Hence, it will be prudent to wait for strong follow-through selling before positioning for an extension of this week's sharp retracement slide from the highest level since mid-August. Market participants now look to the US Existing Homes Sales data, which, along with speeches by influential FOMC members, will drive the USD and provide some impetus to the AUD/USD pair.

Technical levels to watch