The AUD/USD pair gains strong follow-through traction for the second successive day on Friday and climbs to a nearly two-week high during the first half of the European session. The pair currently trades just above the 0.6700 round-figure mark and is drawing support from a combination of factors.
Multi-billion-dollar lifelines for troubled banks in the US and Europe ease fears about widespread contagion, which, in turn, boosts investors' confidence. This is evident from a modest recovery in the equity markets, which undermines the safe-haven US Dollar and benefits the risk-sensitive Aussie. Apart from this, expectations that the Federal Reserve will adopt a less hawkish stance in the wake of worsening economic conditions weigh on the buck and provide a goodish lift to the AUD/USD pair.
Last week's collapse of two mid-size US banks - Silicon Valley Bank and Signature Bank - forced investors to scale back their bets for more aggressive interest rate hikes by the Fed. In fact, the markets are now pricing in a nearly 90% chance of a smaller 25 bps lift-off at the upcoming FOMC meeting on March 21-22. This leads to a modest downtick in the US Treasury bond yields, which is seen as another factor dragging the USD lower and contributing to the strong bid tone surrounding the AUD/USD pair.
Investors, however, remain worried about the possibility of a full-blown global banking crisis. This, along with looming recession risks, should keep a lid on any optimism in the markets and cap the upside for the AUD/USD pair. Furthermore, the Reserve Bank of Australia's (RBA) recent dovish shift, signalling that it might be nearing the end of its rate-hiking cycle, warrants some caution for aggressive bullish traders and before positioning for any meaningful near-term appreciating move for the major.
Nevertheless, the AUD/USD pair remains on track to end the week on a positive note and reverse a major part of last week's losses to its lowest level since November 2022. Market participants now look to the release of the Michigan US Consumer Sentiment Index for short-term opportunities later during the early North American session on Friday. The focus, however, will remain on the outcome of the highly-anticipated FOMC policy meeting, scheduled to be announced next Wednesday.
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