- AUD/USD rebounded from a two-year low hit on Tuesday amid a modest dollar pullback.
- A further decline in US bond yields triggered dollar profit-taking near a 20-year high.
- Aggressive bets on Fed rate hikes and recession fears should limit dollar losses and in turn cap the pair.
The pair AUD/USD bounced slightly from the two-year low reached on Tuesday and rose steadily to 0.6750 during the early American session.
The global flight to safety continued to drag US Treasury yields lower, forcing the dollar to give back intraday gains to hit a new two-decade high. This, in turn, was seen as a key factor helping the AUD/USD pair attract some buying around the 0.6700 round figure. That said, the recovery attempt is likely to be short-lived and risks fading quickly.
Prospects for a more aggressive Fed policy tightening, coupled with the prevailing risk-off mood, should limit any significant corrective pullback in the USD and cap the AUD/USD pair. Investors seem convinced that the Federal Reserve will maintain a faster rate hike path to curb rising inflation. These bets were reaffirmed by last week’s FOMC minutes, which emphasized the need to fight inflation, even if it means an economic slowdown.
Furthermore, rapidly rising interest rates, coupled with the protracted Russia-Ukraine conflict and further COVID-19 lockdowns in China, have fueled recession fears and continued to weigh on investor sentiment. This was made evident by prolonged selling in equity markets, which could give more support to the safe haven dollar. Additionally, the recent plunge in commodity prices should act as a headwind for the resource-linked Aussie.
Therefore, it will be prudent to wait for strong follow-on buying before confirming that the AUD/USD has formed a short-term bottom and positioning for further gains ahead of key macro data. On Wednesday, the latest figures on consumer inflation in the United States will be published, which will influence the dynamics of dollar prices. Traders will continue to watch for the release of Australian employment data on Thursday before making any further directional bets.
Meanwhile, US bond yields could boost dollar demand amid the absence of market-relevant economic releases in the US on Tuesday. Aside from this, the overall market risk sentiment should give the AUD/USD pair some lift and allow traders to take advantage of short-term opportunities.
Technical levels
Source: Fx Street
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