AUD/USD trades with modest gains around mid-0.7100s, lacks bullish conviction

• AUD/USD attracted some dip-buying on Tuesday and was supported by a combination of factors.
• A turnaround in the risk sentiment undermined the safe-haven USD and provided a goodish lift.
• Rising US bond yields, hawkish Fed expectations helped limit the USD losses and capped the pair.

The AUD/USD pair retreated a few pips from the daily high touched in the last hour and was last seen trading just below mid-0.7100s, up over 0.25% for the day.

The pair attracted fresh buying near the 0.7100 mark on Tuesday and rallied to a two-day high during the first half of the European session. A positive turnaround in the global risk sentiment undermined the safe-haven US dollar and turned out to be a key factor that benefitted the perceived riskier aussie.

In the latest geopolitical development, Russia said that several military drills have finished and some troops near the Ukraine border have started returning to bases. The headlines helped ease worries about an imminent Russian invasion of Ukraine, which was evident from a solid rebound in the equity markets.

The risk-on impulse, along with the growing acceptance that the Fed will adopt a more aggressive policy response to combat stubbornly high inflation triggered a fresh leg up in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond jumped back above the 2.0% threshold in the last hour.

This, along with rising bets for a 50 bps Fed rate hike move in March, acted as a tailwind for the greenback and kept a lid on any meaningful upside for the AUD/USD pair, at least for now. This warrants some caution for bullish traders and before positioning for a further intraday appreciating move for the pair.

Market participants now await the release of the US Producer Price Index (PPI) for January, due later during the early North American session. This, along with the US bond yields, should influence the USD demand. Apart from this, the broader market risk sentiment could produce some trading opportunities around the AUD/USD pair.

Technical levels to watch