AUDUSD sticks to modest intraday gains around 0.6700, upside potential seems limited

• AUDUSD catches fresh bids on Friday amid subdued USD demand, though lack follow-through.
• A softer risk tone continues to act as a tailwind for the greenback and caps gains for the major.
• China’s COVID-19 woes, geopolitical risks also act as a headwind for the risk-sensitive Aussie.

The AUDUSD pair builds on the overnight bounce from the 0.6635-0.6630 area, or the weekly low and gains some positive traction on the last day of the week. The pair, however, retreats a few pips from the daily high and trades around the 0.6700 mark during the early European session.

A modest downtick in the US Treasury bond yields keeps the US Dollar bulls on the defensive, which, in turn, is seen as a key factor offering some support to the AUDUSD pair. That said, expectations that the Federal Reserve (Fed) will continue to hike interest rates, although at a slower pace, act as a tailwind for the buck. In fact, the upbeat US Retail Sales data released on Wednesday cast doubts on the peak inflation narrative and forced investors to scale back their bets for a less aggressive policy tightening by the Fed.

Moreover, St. Louis Fed President James Bullard said on Thursday that the policy is not yet in a range estimated to be sufficiently restrictive to reduce inflation. This, along with the cautious mood, helps limit losses for the safe-haven buck. Investors remain concerned about economic headwinds stemming from a new COVID-19 outbreak in China and geopolitical risks. This, in turn, keeps a lid on any further gains for the risk-sensitive Aussie.

Apart from this, expectations that the Reserve Bank of Australia (RBA) will stick to its dovish course might hold back bulls from placing aggressive bets around the AUDUSD pair. Traders now look to the release of the US Existing Home Sales data for some impetus. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and produce short-term trading opportunities around the AUDUSD pair.

Technical levels to watch