AUD/USD sticks to modest gains near mid-0.6600s, upside potential seems limited

• AUD/USD gains some positive traction amid a modest USD pullback from a two-month high.
• A positive risk tone prompts some USD profit-taking and benefits the risk-sensitive Aussie.
• Hawkish Fed expectations and the US debt ceiling optimism could help limit the USD losses.
• Investors look forward to Fed Chair Jerome Powell’s speech for some meaningful impetus.

The AUD/USD pair attracts fresh buyers on Friday and reverses a major part of the overnight slide to the 0.6600 neighbourhood, or a nearly three-week low. The pair sticks to modest intraday gains through the early European session and is currently placed near the top end of its daily range, around mid-0.6600s.

The US Dollar (USD) pulls back from its highest level since March 20 and turns out to be a key factor lending support to the AUD/USD pair. A generally positive tone around the equity markets prompts some profit-taking around the safe-haven buck and benefits the risk-sensitive Aussie. The downside for the USD, however, seems limited amid growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer and the latest optimism over the potential lifting of the US debt ceiling

In fact, Dallas Fed President Lorie Logan said on Thursday that the economic data points so far don’t justify skipping a rate increase at the next policy meeting in June. This comes on the back of the recent hawkish comments by several Fed officials and forces investors to scale back their bet for rate cuts later this year. Furthermore, top US congressional Republican Kevin McCarthy noted that negotiations are at a better place than last week and expected a bill to raise the government's $31.4 trillion debt ceiling on the House floor next week.

This, in turn, keeps the US Treasury bond yields elevated, which, along with Thursday's better-than-expected US macro data, should continue to act as a tailwind for the USD. Apart from this, worrying signs about global economic growth, particularly in China, should further benefit the Greenback's relative safe-haven status. In fact, data from China this week showed that the world's second-largest economy underperformed in April. This, in turn, warrants caution before placing aggressive bullish bets around the AUD/USD pair.

Traders might also prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's speech later during the US session, which will be closely scrutinized for fresh clues about the US central bank's next policy move. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the AUD/USD pair. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the downside and any subsequent move up might get sold into.

Technical levels to watch