AUD/USD remains on the defensive, around 0.6920 area amid modest USD strength

• AUD/USD attracts some dip-buying on Wednesday, though lacks bullish conviction.
• Retreating US bond yields seem to cap the USD and offer some support to the major.
• Recession fears, hawkish Fed expectations favour USD bulls and cap gains for the pair.

The AUD/USD pair reverses an intraday dip to sub-0.6900 levels and climbs back closer to the top end of its daily range during the early part of the European session. The pair, however, lacks follow-through buying and is currently trading with modest intraday losses, around the 0.6915-0.6920 region.

The US dollar trims a part of its intraday gains and turns out to be a key factor offering some support to the AUD/USD pair. A softer tone around the US Treasury bond yields seems to weigh on the greenback, though hawkish Fed expectations should limit the downside. Apart from this, the caution market mood could benefit the safe-haven buck and contribute to keeping a lid on any meaningful upside for the major.

Market participants seem convinced that the Fed would continue to tighten its monetary policy to tame inflation and have been pricing in at least a 50 bps rate hike at the September FOMC meeting. This, along with headwinds stemming from COVID-19 lockdowns in China, adds to worries about a global economic downturn. Recession fears weigh on investors' sentiment and should act as a headwind for the risk-sensitive aussie.

The downside, however, seems cushioned, at least for the time being, as investors might prefer to wait for a hawkish message from Fed Chair Jerome Powell at the Jackson Hole symposium on Friday. Powell's speech will be looked for clues about a 75 bps rate hike in September, which will influence the USD price dynamics.

In the meantime, traders might take cues from Wednesday's US economic docket - featuring Durable Goods Orders and Pending Home Sales data later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus to the AUD/USD pair.

Technical levels to watch