AUD/USD touches fresh daily top near 0.6765 region, upside potential seems limited

• AUD/SUD catches fresh bids on Friday and draws support from a combination of factors.
• The upbeat Chinese data benefits the Aussie amid the emergence of some USD selling.
• Recession fears, hawkish Fed expectations should limit the USD losses and cap the major.

The AUD/USD pair regains positive traction on the last day of the week and builds on its steady intraday descent through the first half of the European session. The momentum lifts spot prices to a fresh daily high, around the 0.6765 region in the last hour, and is sponsored by the emergence of fresh selling around the US Dollar.

A modest pullback in the US Treasury bond yields is turning out to be a key factor exerting some downward pressure on the buck. Adding to this, the upbeat Chinese macro data fueled optimism about a strong recovery in the world's second-largest economy, which further dents the Greenback's safe-haven status and provides an additional boost to the China-proxy Australian Dollar. That said, a combination of factors might hold back bulls from placing aggressive bets around the AUD/USD pair and keep a lid on any further gains, at least for the time being.

Firming expectations that the Federal Reserve will stick to its hawkish stance for longer in the wake of stubbornly high inflation should act as a tailwind for the US bond yields and lend support to the USD. The bets were lifted by hawkish commentary by a slew of influential FOMC members, stressing the need for higher rate hikes to fully gain control over inflation. This had pushed the yield on the benchmark 10-year US government bond to its highest level since last November and the rate-sensitive two-year Treasury note to levels last seen in July 2007 on Thursday.

Furthermore, worries about economic headwinds stemming from rapidly rising borrowing costs continue to weigh on investors' sentiment. This is evident from the prevalent cautious mood around the equity markets, which should further help limit losses for the Greenback and contribute to capping the upside for the AUD/USD pair. Even from a technical perspective, the recent breakdown below the very important 200-day Simple Moving Average (SMA) favours bearish trades and suggests that the path of least resistance for spot prices remains to the downside.

Market participants might also refrain from placing aggressive bets ahead of next week's Reserve Bank of Australia (RBA) monetary policy meeting. In the meantime, traders on Friday will take cues from the US ISM Services PMI, due for release later during the early North American session. This, along with the US bond yields and the risk sentiment, will drive the USD demand and produce short-term trading opportunities around the AUD/USD pair.

Technical levels to watch