AUD/USD sticks to modest gains above 0.6200 amid softer USD, not out of the woods yet

• AUD/USD attracts some dip-buying near the 0.6200 mark, though lacks follow-through.
• A positive risk tone undermines the safe-haven USD and offers support to the aussie.
• Aggressive Fed rate hike bets, recession fears help limit the USD losses and cap the pair.

The AUD/USD pair kicks off the new week on a positive note and attracts some buying near the 0.6200 mark, reversing a part of Friday's losses. The pair maintains its bid tone through the Asian session and is currently placed around the 0.6225-0.6230 region, though the uptick lacks bullish conviction.

Signs of stability in the financial markets prompt some selling around the safe-haven US dollar and turn out to be a key factor offering support to the risk-sensitive aussie. That said, concerns about the economic fallout from China's zero-COVID policy, along with growing recession fears, should keep a lid on any optimistic move. Further, the prospects for a more aggressive policy tightening by the Fed might continue to act as a tailwind for the buck and cap any meaningful upside for the AUD/USD pair, at least for the time being.

The market seems convinced that the Fed will continue to hike interest rates at a faster pace to curb inflation and pricing in a nearly 100% chance of another supersized 75 bps increase in November. The bets were reaffirmed by the stronger US consumer inflation figures released last week, which remain supportive of elevated US Treasury bond yields. This, in turn, supports prospects for the emergence of fresh USD buying and suggests that the path of least resistance for the AUD/USD pair is to the downside, warranting caution for bulls.

Market participants now look forward to the US Empire State Manufacturing Index for some impetus later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the AUD/USD pair. The focus will then turn to the RBA monetary policy meeting minutes and top-tier Chinese macro data, due for release during the Asian session on Tuesday, which will play a key role in driving the China-proxy Australian dollar.

Technical levels to watch