AUD/USD bounces off multi-day low, upside potential seems limited ahead NFP

• AUD/USD reverses an intraday dip to a multi-day low, though lacks any follow-through.
• Aggressive Fed rate hike bets should act as a tailwind for the USD and cap the upside.
• Investors now look forward to the crucial US NFP report for a fresh directional impetus.

The AUD/USD pair drops to over a one-week low on Friday, albeit manages to bounce back above the 0.6400 mark during the early European session. Any meaningful recovery, however, still seems elusive amid the underlying bullish sentiment surrounding the US dollar.

In fact, the USD Index - which measures the greenback's performance against a basket of currencies - climbs to the top end of its weekly range amid hawkish Fed expectations. Investors seem convinced that the US central bank will stick to its aggressive policy tightening path to tame inflation and have been pricing in another supersized 75 bps rate hike in November. The bets were reaffirmed by several FOMC officials, reiterating that policymakers remain committed to bringing inflation under control.

This, in turn, remains supportive of elevated US Treasury bond yields, which, along with worries about a deeper global economic downturn, continue to underpin the safe-haven buck. The Australian dollar, on the other hand, is weighed down by the Reserve Bank of Australia's (RBA) decision to slow the pace of policy tightening and raise interest rates by 25 bps earlier this week. This, in turn, favours bearish traders and suggests that the path of least resistance for the AUD/USD pair is to the downside.

Market participants, however, seem reluctant to place aggressive bearish bets around the AUD/USD pair and prefer to move to the sidelines ahead of the closely-watched US monthly jobs report. The popularly known NFP report is due for release later during the early North American session and will influence Fed rate hike expectations and determine the near-term trajectory for the buck. In the meantime, some repositioning trade might infuse volatility and provide some impetus to the major.

Technical levels to watch