AUD/USD recovers further from two-week low, climbs to 0.7230 area amid positive risk tone

• AUD/USD edged higher for the second successive day on Wednesday amid modest USD weakness.
• The risk-on impulse weighed on the safe-haven USD and benefitted the perceived riskier aussie.
• Elevated US bond yields should limit the USD losses and cap the pair ahead of the FOMC decision.

The AUD/USD pair extended its steady intraday ascent through the early European session and climbed to a two-day high, around the 0.7230-0.7235 region in the last hour.

Following the previous day's two-way price move, the AUD/USD pair attracted some buying near the 0.7180 region on Wednesday and is now looking to build on the momentum beyond the 100-day SMA. A generally positive risk tone undermined the safe-haven US dollar and was seen as a key factor that benefitted the perceived riskier aussie.

Against the backdrop of hopes for a possible diplomatic solution to end the war in Ukraine, reports that China will keep the stock market stable boosted investors' confidence. This was evident from a strong rally in the Asian equity markets, which, in turn, drove flows away from traditional safe-haven assets, including the greenback.

That said, a combination of factors should act as a tailwind for the buck and cap any meaningful upside for the AUD/USD pair, at least for now. Concerns about a further escalation in the Russia-Ukraine conflict should keep a lid on the optimism. This, along with elevated US Treasury bond yields, favours the USD bulls.

The markets seem convinced that the recent geopolitical developments might do little to hold back the Fed from hiking interest rates to combat high inflation. The prospects for an imminent start of the policy tightening cycle by the Fed pushed the yield on the benchmark 10-year government bond to the highest level since June 2019.

Investors might also prefer to wait for the outcome of a two-day FOMC policy meeting, scheduled to be announced later during the US session on Wednesday. This, in turn, might hold back traders from placing aggressive bullish bets around the AUD/USD pair and positioning for any meaningful appreciating move in the near term.

Heading into the key central bank event risk, the US monthly Retail Sales figures might provide some impetus to the AUD/USD pair. Apart from this, traders will take cues from the incoming headlines surrounding the Russia-Ukraine saga, which should influence the broader market risk sentiment and drive demand for the safe-haven USD.

Technical levels to watch