AUD/USD remains on the defensive, downside seems cushioned amid risk-on, ahead of Powell

• AUD/USD edged lower on Thursday and eroded a part of the overnight gains to the weekly high.
• Bets for aggressive Fed rate hikes revived the USD demand and exerted some downward pressure.
• The risk-on impulse helped limit deeper losses as investors now await Fed Chair Powell’s speech.

The AUD/USD pair remained on the defensive through the mid-European session and was last seen hovering near the lower end of its daily trading range, around the 0.7425-0.7420 region.

As investors digested more hawkish RBA minutes released earlier this week, the AUD/USD pair met with a fresh supply on Thursday and eroded a part of the overnight gains to the weekly high. China vowed to cut steel output in 2022, which, in turn, was seen as a key factor that acted as a headwind for the resources-linked Australian dollar. Apart from this, the emergence of some US dollar dip-buying exerted some downward pressure on spot prices.

The greenback drew support from a fresh leg up in US Treasury bond yields, boosted by hawkish Fed expectations, and has now reversed its early lost ground to the weekly low. In fact, the markets seem convinced that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation and have been pricing in multiple 50 bps rate hikes. This had sent the US 10-year real yields into the positive territory for the first time in two years.

That said, the risk-on impulse - as depicted by strong move up in the equity markets - capped the safe-haven buck and offered some support to the perceived riskier aussie. Apart from this, softer US macro data further held back the USD bulls from placing aggressive bets and helped limit deeper losses for the AUD/USD pair. Investors also seemed reluctant ahead of Fed Chair Jerome Powell's speech at an International Monetary Fund event later during the US session.

Nevertheless, the bias seems tilted firmly in favour of the USD bulls and supports prospects for the resumption of the AUD/USD pair's recent sharp pullback from the YTD peak touched on April 5. That said, it will still be prudent to wait for sustained weakness below the 0.7400 mark before confirming that this week's bounce from the 0.7340 region, or the one-month low has lost steam.

Technical levels to watch