AUD/USD clings to strong intraday gains on weaker USD, remains below mid-0.6400s

• AUD/USD gains strong positive traction on Monday and is supported by a sharp USD slide.
• A hawkish BoJ-inspired rally in the JPY weighs on the USD as trades look to the key US CPI.
• China’s economic woes might hold back bulls from placing aggressive bets around the pair.

The AUD/USD pair catches aggressive bids on the first day of a new week and sticks to its strong intraday gains, near a multi-day peak through the first half of the European session. Spot prices currently trade just below mid-0.6400s, up nearly 1% for the day, and draw support from a sharp US Dollar (USD) downfall.

The hawkish Bank of Japan (BoJ)-inspired strong move up in the Japanese Yen (JPY) drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, away from a six-month peak touched on Friday. The USD downfall could further be attributed to some repositioning trade ahead of this week's important US macro data, including the latest consumer inflation figures on Wednesday.

The crucial US CPI report will play a key role in influencing market expectations about the Federal Reserve's (Fed) future rate hike path, which, in turn, will drive the USD demand and provide a fresh directional impetus to the AUD/USD pair. In the meantime, the prospects for further policy tightening by the Fed should help limit the downside for the buck and cap any further gains for the major.

In fact, market participants seem convinced that the US central bank will stick to its hawkish stance and have been pricing in the possibility of one more 25 bps lift-off by the end of this year. Furthermore, the upbeat US macro data released last week pointed to a resilient economy and should allow the Fed to keep interest rates higher for longer. This remains supportive of elevated US Treasury bond yields.

The aforementioned fundamental backdrop favours the USD bulls, though a generally positive tone around the equity markets is seen benefitting the risk-sensitive Aussie. Investors cheered the better-than-expected China inflation data released over the weekend, which showed that consumer price inflation rose back into positive territory in August and raised hopes that the economy might be stabilizing.

That said, concerns about the worsening conditions in the world's second-largest economy and headwinds stemming from rapidly rising borrowing costs should cap any optimism in the markets. This, in turn, makes it prudent to wait for strong follow-through buying before confirming that the AUD/USD pair has formed a near-term bottom and positioning for any further appreciating move.

Technical levels to watch