AUD/USD clings to gains near 0.7035-40 area, focus shifts to RBA decision on Tuesday

• The risk-on impulse prompted some short-covering around the perceived riskier aussie.
• Hawkish Fed expectations underpinned the USD and might cap the upside for AUD/USD.
• Investors now look forward to the RBA decision on Tuesday for some meaningful impetus.

The AUD/USD pair maintained its bid tone through the mid-European session and was last seen hovering near the top end of its daily trading range, around the 0.7035-40 region.

Having shown some resilience below the key 0.7000 psychological mark, the AUD/USD pair witnessed some short-covering on Monday and recovered a part of the previous day's losses to a fresh YTD low. The global risk sentiment stabilized a bit in reaction to reports from South Africa, suggesting that Omicron patients only had relatively mild symptoms. This, in turn, led to a strong recovery in the equity markets and benefitted the perceived riskier aussie.

The upbeat market mood got an additional boost after the People’s Bank of China (PBOC) slashed the bank's Reserve Requirement Ratio (RRR) by 50bps, releasing 1.2 trillion-yuan long-term liquidity. Despite the supporting factors, the uptick lacked bullish conviction amid the prevalent bullish sentiment surrounding the US dollar. The prospects for a faster policy tightening by the Fed acted as a tailwind for the greenback and might cap gains for the AUD/USD pair.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation and have been pricing in the possibility of liftoff by May 2022. Apart from this, rebounding US Treasury bond yields favours the USD bulls. This, in turn, makes it prudent to wait for a strong follow-through buying before confirming that the AUD/USD pair has formed a near-term base and positioning for any further appreciating move.

There isn't any major market-moving economic data due for release from the US, leaving the USD at the mercy of the US bond yields. Apart from this, developments surrounding the coronavirus saga and the broader market risk sentiment will influence the USD price dynamics. This should provide some impetus to the AUD/USD pair ahead of the RBA policy decision on Tuesday.

Technical levels to watch