AUD/USD flirts with daily low, seems vulnerable amid stronger USD/softer risk tone

• A combination of factors prompted fresh selling around AUD/USD on Monday.
• The USD stood tall near a two-decade high amid aggressive Fed rate hike bets.
• Recession fears, a softer risk tone further undermined the risk-sensitive aussie.

The AUD/USD pair struggled to capitalize on last week's recovery move from the 0.6765-0.6760 area, or over a two-year low and met with a fresh supply on Monday. The pair remained on the defensive heading into the European session and was last seen trading near the daily low, around the 0.6820-0.6815 region.

Following Friday's post-NFP modest pullback from a fresh two-decade high, the US dollar was back in demand amid growing acceptance that the Fed would stick to its faster policy tightening path. The bets were reaffirmed by the latest US monthly jobs report, which showed that the economy added 372K jobs in June as against 268K anticipated. Apart from this, the worsening economic outlook further underpinned the safe-haven buck and exerted downward pressure on the risk-sensitive aussie.

Investors remain concerned that rapidly rising interest rates and tightening financial conditions would pose challenges to global economic growth. This, along with the ongoing Russia-Ukraine war and the latest COVID-19 outbreak, has been fueling recession fears. The combination of factors favours the USD bulls and supports prospects for the resumption of the AUD/USD pair's bearish trend. Hence, a fall back towards the 0.6765-0.6760 support zone, or the YTD low, remains a distinct possibility.

There isn't any major market-moving economic data due for release from the US on Monday. That said, the broader market risk sentiment would influence the USD price dynamics and provide some impetus to the AUD/USD pair. The focus, however, would remain on the US consumer inflation figures on Wednesday. Traders will further take cues from the US monthly Retail Sales data and Prelim Michigan Consumer Sentiment on Friday. This will play a key role in driving the near-term USD demand and help determine the next leg of a directional move for the AUD/USD pair.

Technical levels to watch