AUD/USD bounces off two-week low, upside potential seems limited amid geopolitical risks

• AUD/USD attracted some buying on Tuesday and reversed an early dip to over a two-week low.
• Retreating US bond yields prompted some USD profit-taking and extended support to the pair.
• The Russia-Ukraine crisis, Fed rate hike expectations should keep a lid on any meaningful gains.

The AUD/USD pair seesawed between tepid gains/minor losses through the early European session and was last seen trading with modest intraday gains, around the 0.7200 mark.

The pair attracted some buying near the 0.7165 region on Tuesday and for now, seems to have defended support marked by an upward sloping trend-line extending from the YTD low touched in January. China reported better-than-expected growth in retail sales, fixed-asset investment and industrial production data on Tuesday. This, along with the emergence of some US dollar selling, assisted the AUD/USD pair to stall its recent pullback from the vicinity of mid-0.74000s, or a near five-month high touched last week.

The USD downtick could be attributed to some profit-taking amid retreating US Treasury bond yields, though a combination of factors should help limit the downside. The market sentiment remains fragile in the wake of the risk of a further escalation in the Russia-Ukraine conflict and the latest COVID-19 outbreak in China. Apart from this, expectations for an imminent start of the policy tightening cycle by the Fed should act as a tailwind for the greenback and keep a lid on any meaningful recovery for the AUD/USD pair.

The markets seem convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations. This, in turn, was seen as a key factor that pushed the yield on the benchmark 10-year US government bond to its highest level since June 2019 on Monday and favours the USD bulls. Hence, the focus will remain glued to the outcome of a two-day FOMC policy meeting, scheduled to be announced during the US session on Wednesday.

In the meantime, traders might take cues from the US economic docket, featuring the release of the Producer Price Index and the Empire State Manufacturing Index later during the early North American session. The data, however, might do little to provide any meaningful impetus to the AUD/USD pair as investors will keep a close eye on the incoming headlines surrounding the Russia-Ukraine saga.

Technical levels to watch