AUD/USD climbs to mid-0.6900s amid modest USD weakness, risk-on impulse

• AUD/USD gains traction for the second straight day and recovers further from a six-week low.
• Retreating US bond yields, the risk-on impulse weighs on the USD and offers support to the pair.
• Aggressive Fed rate hike bets should limit any deeper USD losses and keep a lid on the major.

The AUD/USD pair attracts some dip-buying near the 0.6875 region on Tuesday and turns positive for the second successive day. The momentum allows spot prices to recover further from a six-week low touched on Monday and climbs to mid-0.6900s during the first half of the European session amid the emergence of fresh US dollar selling.

A further decline in the US Treasury bond yields turns out to be a key factor dragging the USD away from a 20-year high touched the previous day. Apart from this, the risk-on impulse - as depicted by the strong rally in the equity markets – further underpins the safe-haven greenback and benefits the risk-sensitive aussie.

Chinese authorities pledged to stimulate the world’s second-largest economy and boosted investors' confidence. That said, growing worries about a deeper global economic downturn could keep a lid on any optimistic move in the markets. Furthermore, hawkish Fed expectations should limit the USD losses and cap the AUD/USD pair.

The markets seem convinced that the Fed will stick to its aggressive policy tightening path and have been pricing in a 75 bps rate hike at the September FOMC meeting. The bets were reaffirmed by Fed Chair Jerome Powell's hawkish remarks on Friday, signalling that interest rates would be kept higher for longer to bring down inflation.

The fundamental backdrop favours the USD bulls and warrants some caution before positioning for any further appreciating move for the AUD/USD pair. Moving ahead, traders now look forward to the US economic docket - featuring JOLTS Job Openings and the Conference Board's Consumer Confidence Index - for a fresh impetus.

The data, along with the US bond yields, will influence the USD price dynamics. Apart from this, the broader market risk sentiment might further contribute to producing short-term trading opportunities around the AUD/USD pair. The focus, however, remains on the closely-watched US monthly jobs report (NFP), due on Friday.

Technical levels to watch