AUD/USD struggles to capitalize on modest recovery from near two-month low

• AUD/USD gained some positive traction on Thursday and reversed a part of the overnight decline.
• A positive risk tone prompted some USD profit-taking and benefitted the perceived riskier aussie.
• The Fed-RBA monetary policy divergence should keep a lid on any meaningful gains for the major.

The AUD/USD pair held on to its modest recovery gains through the early European session, albeit seemed struggling to capitalize on the move beyond the 0.7200 mark.

The pair gained some positive traction during the early part of the trading action on Thursday and recovered a part of the previous day's slide to the lowest level since early October. Following the recent strong runup to a 16-month peak, the US dollar witnessed some profit-taking and extended some support to the AUD/USD pair.

Apart from this, a generally positive tone around the equity markets further benefitted the perceived riskier aussie. The uptick, however, lacked bullish conviction amid the divergence in monetary policy stance between the Reserve Bank of Australia (RBA) and the Fed. This, along with COVID-19 jitters, capped gains for the AUD/USD pair.

The RBA has made every effort to push back expectations for a rate hike as early as next year. On the other hand, investors seem convinced that the Fed would raise interest rates sooner rather than later to contain stubbornly high inflation. The bets were lifted further after Wednesday's release of the US PCE Price Index and the FOMC minutes.

In fact, the headline US PCE Price Index accelerated to the highest level since December 1990, while the Core PCE Price Index also rose to a 30-year high in October. Moreover, the FOMC minutes showed that policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to hike rates if high inflation persists.

Meanwhile, investors remain worried about the potential economic fallout from the rising number of cases and the imposition of fresh lockdown measures in Europe. The fundamental backdrop supports prospects for the emergence of some USD dip-buying and warrants caution before positioning for any meaningful recovery for the AUD/USD pair.

Given that the US banks will remain closed on Thursday in observance of Thanksgiving Day, relatively thin liquidity should further hold back traders from placing bullish bets around the AUD/USD pair. Hence, a strong follow-through buying is needed to confirm that AUD/USD pair formed a near-term bottom near the 0.7185-80 region.

Technical level to watch