AUD/USD flirts with daily low, below 0.7200 mark amid weaker risk sentiment

• AUD/USD witnessed fresh selling on Friday and drifted back closer to the weekly low.
• The risk-off mood was seen as a key factor weighing on the perceived riskier aussie.
• Retreating US bond yields kept the USD bulls on the defensive and helped limit losses.

The AUD/USD pair now seems to have entered a bearish consolidation phase and was seen oscillating in a narrow trading band near the daily low, just below the 0.7200 mark.

Having faced rejection near the 100-day SMA on Thursday, the AUD/USD pair met with a fresh supply on the last day of the week and was pressured by the dominant risk-off theme. Investors turned nervous amid reviving fears about strong inflationary pressures and the prospects for a faster policy tightening by the Fed, which could dent the earnings outlook for companies. The anti-risk flow was evident from a weaker trading sentiment around the equity markets, which was seen as a key factor weighing on the perceived riskier aussie.

Meanwhile, the global flight to safety dragged the US Treasury bond yields further away from the multi-year highs touched earlier this week. This, in turn, undermined the US dollar and extended some support to the AUD/USD pair, at least for the time being. That said, expectations that the Fed would begin raising interest rates in March to combat stubbornly high inflation continued acting as a tailwind for the greenback. Moreover, the markets have been pricing in the possibility for a total of four rate hikes in 2022, which further favours the USD bulls.

The fundamental backdrop supports prospects for a further near-term depreciating move. The negative outlook is reinforced by the formation of a bearish flag pattern on the daily chart. Some follow-through selling below the weekly low, around the 0.7170 area, will validate the bearish bias and turn the AUD/USD pair vulnerable. Investors, however might refrain from placing aggressive bets ahead of the FOMC meeting on January 25-26. The outcome will provide fresh clues about the timing when the Fed will commence its rate hike cycle and influence the USD price dynamics.

In the meantime, the US bond yields will drive the USD demand. This, along with the broader market risk sentiment, should allow traders to grab some short-term opportunities around the AUD/USD pair amid absent relevant market moving economic releases from the US.

Technical levels to watch