AUD/USD pulls back from multi-month high, slides to 0.6870 amid modest USD bounce

• AUD/USD corrects from its highest level since February touched on Thursday.
• A modest USD recovery from a multi-week low prompt some profit-taking.
• The Fed rate hike uncertainty might cap the USD and limit losses for the pair.

The AUD/USD pair comes under some selling pressure during the Asian session on Friday and erodes a part of the previous day's blowout rally to 0.6900 neighbourhood, or its highest level since February 22. The pair currently trades around the 0.6870 region, down over 0.20% for the day, and for now, seems to have snapped a six-day winning streak.

Having registered heavy losses over the past three days, the US Dollar (USD) stages a modest bounce from over a five-week low. This, in turn, prompts traders to lighten their bullish bets around the AUD/USD pair, especially after the recent blowout rally of over 500 pips since the beginning of the current week. The USD upside, however, seems limited in the wake of expectations that the Federal Reserve (Fed) is getting closer to the peak of its policy tightening cycle, warranting caution before positioning for any meaningful corrective slide for the major.

It is worth recalling that the US central bank decided to leave interest rates unchanged at the end of a two-day policy meeting earlier this week, though indicated that borrowing costs may still need to rise by as much as 50 bps by the end of this year. That said, Thursday's rather unimpressive US macro data - namely Industrial Production, Weekly Jobless Claims and Retail Sales - raised questions over the prospects for additional rate hikes by the Fed to combat stubbornly high inflation. In fact, the US CPI, at 4.0% in May, is still twice the Fed's 2% target.

The uncertainty over the Fed's rate-hike path led to the overnight slump in the US Treasury bond yields, which might hold back the USD bulls from placing aggressive bets. Apart from this, the Reserve Bank of Australia's (RBA) surprise 25 bps lift-off last week and a hawkish policy statement might continue to underpin the Aussie. This might further contribute to limiting the downside for the AUD/USD pair in the absence of any relevant macro data from the US. Nevertheless, spot prices remain on track to record strong gains for the third successive week.

Technical levels to watch