AUD/USD remains on the defensive amid softer risk tone, holds comfortably above 0.7200

• A softer risk tone acted as a headwind for the perceived riskier aussie on Wednesday.
• Retreating US bond yields undermined the USD and extended support to AUD/USD.
• Investors now look forward to the US macro data/FOMC minutes for a fresh impetus.

The AUD/USD pair edged lower heading into the European session and was last seen trading near the daily low, around the 0.7225-20 region.

The pair struggled to capitalize on the previous day's goodish rebound from a near two-week through and met with a fresh supply near the 0.7245-50 region on Wednesday. An extended selloff in the US money markets led to the overnight corrective pullback in the US tech stocks. The spillover effect was evident from a generally weaker trading sentiment around the Asian equity markets, which, in turn, weighed on the perceived riskier aussie.

The downside, however, remains cushioned amid subdued US dollar demand, undermined by retreating US bond yields. That said, expectations for a faster policy tightening by the Fed should act as a tailwind for the greenback. The money markets have been pricing in the possibility for an eventual liftoff by May and two more rate hikes by the end of 2022. This was reinforced by the recent sharp surge in the US Treasury bond yields.

In fact, the US 2-year notes, which are highly sensitive to rate hike expectations along with 5-year notes, soared to their highest since February 2020 on Tuesday. Adding to this, the yield on the benchmark 10-year government bond shot to the highest level since November 24. Hence, the focus will remain on the FOMC meeting minutes, due later this Wednesday.

In the meantime, traders might take cues from the US economic docket – featuring the ADP report on private-sector employment, Building Permits and the final Services PMI. This, along with the US bond yields and the broader market risk sentiment, might produce some short-term trading opportunities around the AUD/USD pair.

Technical levels to watch