AUD/USD struggles near two-year low amid recession fears, sustained USD buying

• AUD/USD remained on the defensive near its lowest level since June 2020.
• Relentless USD buying, the risk-off mood weighed on the risk-sensitive aussie.
• Retreating US bond yields could cap the USD and lend support to the major.

The AUD/USD pair oscillated in a range through the early European session on Tuesday and consolidated its recent decline to the lowest level since June 2020.

The US dollar added to the previous day's strong gains and climbed to a fresh two-decade high amid hawkish Fed expectations. This, along with the prevalent risk-off mood, offered additional support to the safe-haven greenback and acted as a headwind for the risk-sensitive aussie.

Investors now seem convinced that the Fed would stick to its aggressive policy tightening path to curb soaring inflation. The bets were reaffirmed by the FOMC meeting minutes released last week, indicating that another 50 or 75 bps rate hike is likely at the upcoming FOMC meeting in July.

Policymakers also emphasized the need to fight inflation even if it results in an economic slowdown. This, along with the ongoing Russia-Ukraine war and a fresh COVID-19 outbreak in China, has been fueling recession fears and tempered investors' appetite for perceived riskier assets.

Furthermore, the worsening global economic outlook led to the recent decline in commodity prices. This was seen as another factor weighing on the resources-linked Australian dollar and supports prospects for an extension of the AUD/USD pair's downfall witnessed over the past month or so.

That said, the global flight to safety continued exerting downward pressure on the US Treasury bond yields and might hold back the USD bulls from placing fresh bets. This, in turn, could help limit any further losses for the AUD/USD pair ahead of this week's important economic releases.

The latest US consumer inflation figures are due to be published on Wednesday, which will be followed by the monthly Australian employment details on Thursday. Traders will further take cues from the US Retail Sales data and the Prelim Michigan Consumer Sentiment, scheduled on Friday.

In the meantime, the broader market risk sentiment, along with the US bond yields, might influence the USD price dynamics. This, in turn, should provide some impetus to the AUD/USD pair and allow traders to grab short-term opportunities amid absent relevant economic data from the US.

Technical levels to watch