AUD/USD clings to intraday gains above 0.6600 mark, upside potential seems limited

• AUD/USD attracts some buying on Thursday amid a modest USD pullback from a multi-moth peak.
• A combination of factors should limit the USD losses and cap any meaningful upside for the major.
• The RBA’s dovish shift also suggests that the path of least resistance for the pair is to the downside.

The AUD/USD pair regains positive traction on Thursday and moves further away from a nearly four-month low, around the 0.6570-0.6565 area touched the previous day. The pair maintains its bid tone through the first half of the European session and is currently placed near the daily high, comfortably above the 0.6600 round-figure mark.

The US Dollar (USD) eases from over a three-month high and turns out to be a key factor pushing the AUD/USD pair higher. The USD downtick, meanwhile, lacks any obvious fundamental catalyst and is more likely to remain limited amid expectations for more aggressive policy tightening by the Fed. In fact, the markets are now pricing in a jumbo 50 bps lift-off at the next FOMC policy meeting on March 21-22 and the bets were reaffirmed by hawkish comments by Fed Chair Jerome Powell.

On the second day of his testimony to the US Congress, Powell reiterated on Wednesday that interest rates would have to go higher and possibly faster to tame stubbornly high inflation. This remains supportive of elevated US Treasury bond yields and supports prospects for the emergence of some USD dip-buying. Apart from this, the prevalent cautious mood might further contribute to limiting losses for the safe-haven Greenback and capping gains for the risk-sensitive Australian Dollar.

The market sentiment remains fragile amid worries about economic headwinds stemming from rapidly rising borrowing costs. Adding to this, fading optimism over a strong economic recovery in China tempers investors' appetite for riskier assets. This, along with the Reserve Bank of Australia's dovish shift earlier this week, signalling that it might be nearing the end of its rate-hiking cycle, warrants caution for bulls and positioning for any further appreciating move for the AUD/USD pair.

Market participants now look to the US economic docket, featuring the release of Challenger Job Cuts and the usual Weekly Initial Jobless Claims data later during the early North American session. This, along with the US bond yields and the broader risk sentiment, should influence the USD price dynamics and provide some impetus to the AUD/USD pair. The focus, however, will remain glued to the closely-watched US monthly employment report, popularly known as the NFP on Friday.

Technical levels to watch