AUD/USD remains well bid near 0.6565 on weaker USD, upside potential seems limited

• AUD/USD attracts some buying on Wednesday and recovers further from over a two-month low.
• A modest USD downfall and a positive risk tone lend some support to the risk-sensitive Aussie.
• China’s economic woes and bets for more Fed rate hikes should keep a lid on any further gains.

The AUD/USD pair builds on the previous day's goodish rebound from sub-0.6500 levels, or over a two-month low and gains some follow-through positive traction on Wednesday. Spot prices maintain the bid tone through the early part of the European session and currently trade around the 0.6560 region, just a few pips below the daily peak.

The US Dollar (USD) meets with a fresh supply and retreats further from the vicinity of its highest level since July 7 touched on Tuesday, which, in turn, is seen as a key factor pushing the AUD/USD pair higher. Philadelphia Federal Reserve Bank President Patrick Harker's dovish remarks on Tuesday, along with a mildly softer tone surrounding the US Treasury bond yields, seem to undermine the buck. Apart from this, a stable performance around the global equity markets further dents the Greenback;'s relative safe-haven status and benefits the risk-sensitive Australian Dollar (AUD).

The upside potential for the AUD/USD pair, however, seems limited in the wake of the worsening economic conditions in China. The fears were further fueled by weaker Chinese inflation figures, showing that headline CPI turned negative for the first time since February 2021 and the Producer Price Index (PPI) falling for the 10th consecutive month, confirming deflation. This comes on the back of weaker trade data on Tuesday and suggests that the post-COVID recovery in the world's second-largest economy is losing steam, which should act as a headwind for the China-proxy Aussie.

Traders might also refrain from placing aggressive USD bearish bets amid growing acceptance that the Fed will stick to its hawkish stance, which might further contribute to capping the AUD/USD pair. In fact, market participants still seem convinced that the US central bank will keep interest rates higher for longer in the wake of an extremely resilient economy. This, in turn, supports prospects for the emergence of some USD dip-buying and suggests that the path of least resistance for the AUD/USD pair is to the downside, warranting some caution before positioning for further gains.

In the absence of any relevant market-moving economic releases from the US, the fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the AUD/USD pair has formed a near-term bottom. The market focus, meanwhile, remains glued to the latest US consumer inflation figures, due on Thursday. The crucial US CPI report will play a key role in influencing market expectations about the Fed's future rate hike path, which, in turn, will drive the USD demand and help investors to determine the next leg of a directional move for the major.

technical levels to watch