AUD/USD hangs near two-day low, just above 0.7200 amid broad-based USD strength

• A combination of factors prompted fresh selling around AUD/USD on the first day of a new week.
• Omicron fears acted as a headwind for the perceived riskier aussie amid resurgent USD demand.
• Investors might refrain from placing aggressive bets amid the year-end thin liquidity conditions.

The AUD/USD pair extended its steady intraday descent and dropped to a two-day low, around the 0.7200 round-figure mark during the mid-European session.

The pair struggled to capitalize on its early uptick, instead met with a fresh supply near the 0.7240 region and turned lower for the second successive day on Monday. Uncertainty over the economic impact of the continuous rise in new COVID-19 cases overshadowed the recent optimism led by reports that the Omicron variant might be less severe than previously feared. This was evident from the cautious market mood, which, in turn, drove flows away from the perceived riskier aussie.

Meanwhile, worries that the fast-spreading variant and fresh restrictive measures could result in disrupted supply chains across industries provided a modest lift to the safe-haven US dollar. Apart from this, the Fed's hawkish outlook, indicating at least three rate hikes next year, underpinned the greenback. This was seen as another factor that exerted pressure on the AUD/USD pair and dragged spot prices away from a near one-month high, around mid-0.7200s touched last Thursday.

Traders, however, seemed reluctant to place aggressive bets amid the year-end thin liquidity in the markets and absent relevant market moving economic releases. This, in turn, could help limit any further downside for the AUD/USD pair, warranting some caution for aggressive bearish traders. Hence, it will be prudent to wait for a strong follow-through selling before confirming that the recent bounce from the key 0.7000 psychological mark, or the YTD low has run out of steam.

From a technical perspective, any subsequent slide below the 0.7200 mark is likely to find some support near the 0.7180 strong horizontal resistance breakpoint. A convincing break below would be seen as a fresh trigger for bearish traders and turn the AUD/USD pair vulnerable to accelerate the slide back towards challenging the 0.7100 round figure. Conversely, a sustained strength beyond the 0.7240-50 region should pave the way for a further near-term appreciating move.

Technical levels to watch