AUD/USD eyes 0.6800 mark ahead of US CPI, upside potential seems limited

• AUD/USD gained some traction for the second successive day amid subdued USD demand.
• Signs of stability in the markets undermined the USD and benefitted the risk-sensitive aussie.
• Recession fears, Fed rate hike bets to limit the USD fall and cap the pair ahead of the US CPI.

The AUD/USD pair built on the overnight bounce from the 0.6700 neighbourhood, or over a two-year low and edged higher for the second straight day on Wednesday. The uptick extended through the European session and lifted spot prices to a two-day high, around the 0.6785 region in the last hour.

The US dollar oscillated in a narrow trading band below a two-decade high touched on Tuesday amid signs of stability in the financial markets, which, in turn, offered support to the risk-sensitive aussie. The uptick, however, lacked follow-through buying and runs the risk of fizzling out rather quickly.

Growing worries about a possible global recession should keep a lid on any optimistic move. Apart from this, expectations that the Fed would hike interest rates at a faster pace to curb soaring inflation should continue to act as a tailwind for the safe-haven USD and cap the upside for the AUD/USD pair.

It is worth recalling that the FOMC minutes released last week indicated that another 50 or 75 bps rate hike is likely at the July meeting. Policymakers also emphasized the need to fight inflation even if it results in an economic slowdown. Hence, the focus remains on the US consumer inflation figures.

The headline US CPI, due later during the early North American session, is expected to rise from the 8.6% YoY rate in May to 8.8% YoY in June. A stronger-than-expected print will reaffirm hawkish Fed expectations and boost the greenback, which, in turn, should exert pressure on the AUD/USD pair.

Even from a technical perspective, spot prices have been trending lower over the past four weeks or so along a downward-sloping channel. This points to a well-established short-term bearish trend for the AUD/USD pair, suggesting that any subsequent move up could still be seen as a selling opportunity.

Technical levels to watch