AUD/USD recovers from multi-week lows, back around 0.7400 mark

• AUD/USD dropped to multi-week lows on Wednesday amid sustained USD buying.
• Some US dollar profit-taking from a 16-month peak helped ease the bearish pressure.
• Hawkish Fed expectations should act as a tailwind for the buck and cap the upside.

The AUD/USD pair managed to recover a major part of its early lost ground to six-week lows and was last seen trading with only modest intraday losses, around the 0.7300 mark.

The pair extended the previous day's rejection slide from the 100-day SMA and witnessed some follow-through selling during the Asian session on Wednesday. The downward trajectory dragged the AUD/USD pair to the lowest level since October 6 and was sponsored by sustained US dollar buying interest.

The USD, however, struggled to capitalize on its early gains and witnessed some profit-taking near a 16-month peak. This, in turn, helped the bearish pressure surrounding the AUD/USD pair and led to a goodish bounce of around 35-40 pips from the 0.7260 area, though any meaningful recovery seems elusive.

Growing market acceptance that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation should act as a tailwind for the greenback.  In fact, the markets now seem to have started pricing in the possibility for an eventual rate hike move by July 2022.

Moreover, the Fed funds futures indicate a high likelihood of another raise by November. Tuesday's upbeat US macro data, showing that monthly Retail Sales jumped by the most since March, further boosted market bets and supports prospects for the emergence of some dip-buying around the USD.

This makes it prudent to wait for a strong follow-through buying before confirming that the AUD/USD pair might have formed a temporary bottom and positioning for any further gains. Hence, any subsequent move up is more likely to confront stiff resistance and remain capped near the 0.7330 region.

Traders now look forward to the US housing market data – Building Permits and Housing Starts – due later during the early North American session. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and provide some impetus to the AUD/USD pair.

Technical levels to watch