AUD/USD sticks to modest recovery gains below mid-0.7000s, lacks follow-through

• AUD/USD staged a modest recovery from the lowest level since December 7 touched earlier this Friday.
• A positive risk tone undermined the safe-haven greenback and benefitted the perceived riskier aussie.
• Rising bets on multiple Fed rate hikes should limit the USD downside and cap the upside for the major.

The AUD/USD pair traded with a mild positive bias heading into the European session and was last seen hovering near the daily high, around the 0.7040 region.

Having touched its lowest level since December 7, around the 0.7020 area, the AUD/USD pair attracted some buying on Friday and recovered a part of the overnight slump. A recovery in the global risk sentiment – as depicted by a generally positive tone around the equity markets – undermined the safe-haven US dollar and benefitted the perceived riskier aussie. That said, any meaningful recovery still seems elusive amid the prospects for a faster policy tightening by the Fed, which should act as a tailwind for the greenback.

It is worth recalling that the Fed on Wednesday indicated that it could raise interest rates at a faster pace than anticipated to contain stubbornly high inflation. The market was quick to react and started pricing in the possibility of five quarter-point rate hikes by the end of 2022. Moreover, short-term interest rate futures imply a 20% risk that the first hike in March could be 50 basis points. This was reinforced by elevated US Treasury bond yields, which supports prospects for the emergence of some USD dip-buying.

The fundamental backdrop seems tilted firmly in favour of the USD bulls. Hence, any subsequent move up for the AUD/USD pair might still be seen as a selling opportunity and run the risk of fizzling out rather quickly. The pair remains vulnerable to prolonging its recent bearish trajectory and challenging the key 0.7000 psychological mark. Some follow-through selling below the 2021 low will set the stage for a further near-term downward trajectory.

Investors now look forward to the US economic docket – featuring the Core Personal Consumption Expenditure Price index and revised Michigan Consumer Sentiment Index for January. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the AUD/USD pair. Apart from this, traders will take cues from the broader market risk sentiment to grab some short-term opportunities on the last day of the week.

Technical levels to watch