AUD/USD steadily moves back above 0.7100, modest USD strength could cap gains

• A combination of supporting factors pushed AUD/USD higher for the second straight day.
• The perceived riskier aussie benefitted from the risk-on mood and RBA’s optimistic outlook.
• Hawkish Fed expectations continued underpinning the USD and might cap gains for the pair.

The AUD/USD pair shot to a three-day high during the mid-European session, with bulls looking to build on the momentum further beyond the 0.7100 round-figure mark.

The pair gained strong follow-through traction for the second successive day on Tuesday and built on the previous day's recovery move from the lowest level since November 2020. The prevalent risk-on environment, along with the Reserve Bank of Australia's upbeat outlook turned out to be a key factor that acted as a tailwind for the AUD/USD pair.

The market concerns about the economic fallout from the new variant of the coronavirus eased after reports indicated that Omicron patients had only shown mild symptoms. This was evident from a strong bullish trading sentiment around the equity markets, which, in turn, drove flows towards perceived riskier currencies, including the Australian dollar.

The aussie got an additional boost after the RBA indicated the Omicron variant outbreak was unlikely to derail the current economic recovery. This was seen as a hint that the RBA may raise interest rates sooner than expected and remained supportive of the strong intraday move up. That said, a stronger US dollar could cap any further for the AUD/USD pair.

The greenback continued drawing some support from firming expectations that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation. This, along with a further recovery in the US Treasury bond yields, extended some support to the USD and might hold back bulls from placing aggressive bets around the AUD/USD pair.

Even from a technical perspective, RSI (14) on the 1-hour chart is pointing to overbought conditions and further warrants some caution. Hence, it will be prudent to wait for a sustained strength beyond the 200-hour SMA, currently around the 0.7110 region before confirming that the AUD/USD pair has bottomed out and positioning for any further appreciating move.

Technical levels to watch