AUD/USD pares intraday gains, still comfortable above 0.6900 amid modest USD weakness

• AUD/USD staged modest recovery from a near one-month low, though lacked follow-through.
• The risk-on impulse, retreating US bond yields undermine the USD and extended some support.
• Recession fears kept a lid on the optimistic move in the markets and the risk-sensitive aussie.
• Fed rate hike bets favour the USD bulls and support prospects for further losses for the major.

The AUD/USD pair struggled to capitalize on its modest recovery gains and has now retreated nearly 40 pips from the daily peak. The pair was last seen hovering near the 0.6930-0.6935 region, up less than 0.15% for the day.

The early optimistic move in the markets ran out of steam amid concerns that a more aggressive policy tightening by major central banks to curb inflation would pose challenges to the global economy. This, in turn, was seen as a key factor that acted as a headwind for the risk-sensitive aussie, though modest US dollar weakness could help limit further losses for the AUD/USD pair, at least for now.

Following the recent strong bullish run, the US dollar witnessed some profit-taking from a fresh two-decade peak touched on Monday amid retreating US Treasury bond yields. Apart from this, a generally positive tone around the equity markets undermined the greenback's relative safe-haven status. That said, hawkish Fed expectations should continue to lend support to US bond yields and the buck.

Investors now seem convinced that the Fed would raise interest rates at a faster pace than expected to curb soaring inflation. In fact, the markets are pricing in a 175 bps of tightening over the next three meetings, implying at least one 75 bps rate hike by September. Hence, the market focus will remain glued to the outcome of a two-day FOMC meeting, scheduled to be announced on Wednesday.

In the meantime, the US bond yields, along with the broader market risk sentiment, will influence the USD price dynamics and provide a fresh impetus to the AUD/USD pair. Nevertheless, the fundamental backdrop seems tilted firmly in favour of the USD bulls and supports prospects for an extension of the recent downfall witnessed since the beginning of this month.

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