AUD/USD climbs back closer to 0.6700 amid modest USD weakness, not out of the woods yet

• AUD/USD gains some positive traction on Monday and draws support from a modest USD weakness.
• The Fed’s hawkish outlook and economic woes should limit the USD losses and cap gains for the pair.
• Traders now look to Australian CPI report on Wednesday and the US Core PCE Price Index on Friday.

The AUD/USD pair attracts some buying on the first day of a new week and recovers a part of Friday's heavy losses to its lowest level since June 8. Spot prices climb back closer to the 0.6700 round-figure mark during the Asian session, though the uptick lacks bullish conviction and runs the risk of fizzling out rather quickly.

A modest decline in the US Treasury bond yields prompts some selling around the US Dollar (USD), which, in turn, is seen as a key factor lending some support to the AUD/USD pair. Apart from this, a generally positive tone around the US equity futures further undermines the safe-haven Greenback and benefits the risk-sensitive Aussie. That said, worries about a global economic slowdown, particularly in China, might keep a lid on any optimism and keep a lid on any meaningful gains for the China-proxy Australian Dollar.

Apart from this, the Federal Reserve's (Fed) hawkish outlook should help limit the USD losses and further contribute to capping the upside for the AUD/USD pair. It is worth recalling that the Fed earlier this month decided to pause its year-long rate-hiking cycle, though signalled that borrowing costs may still need to rise as much as 50 bps by the end of this year. Adding to this, Fed Chair Jerome Powell reiterated that the central bank will raise interest rates again this year, albeit at a "careful pace", to contain high inflation.

Powell added that the Fed doesn't see rate cuts happening any time soon and is going to wait until it is confident that inflation is moving down to the 2% target. This, along with a slew of interest rate hikes by other major central banks this month, adds to worries about economic headwinds stemming from rising borrowing costs. This, in turn, might hold back traders from placing bearish bets around the USD, making it prudent to wait for strong follow-through buying before confirming that the AUD/USD pair has bottomed out.

There isn't any relevant market-moving economic data due for release on Monday, leaving spot prices at the mercy of the USD demand and the broader risk sentiment. The focus, however, will remain glued to the latest consumer inflation figures from Australia, due on Wednesday. Apart from this, investors this week will also confront the release of the US Core PCE Price Index - the Fed's preferred inflation gauge on Friday. The crucial inflation data will play a key role in determining the next leg of a directional move for the AUD/USD pair.

Technical levels to watch