AUD/USD Forecast: Bears might still aim to challenge YTD low and test 0.6800 mark

• AUD/USD retreated sharply from a one-week high set on Wednesday amid resurgent USD demand.
• Aggressive Fed rate hike bets, elevated US bond yields and recession fears benefitted the greenback.
• RBA’s signal that a bigger rate hike is possible extended support to the aussie and helped limit losses.
• The pair attracted fresh buying on Thursday and seemed unaffected by the mixed domestic jobs data.

The AUD/USD pair witnessed an intraday turnaround from the vicinity of mid-0.7000s, or a one-week high touched earlier on Wednesday and snapped three successive days of the winning streak. The US dollar made a solid comeback and stalled its recent corrective slide from a two-decade high, which, in turn, was seen as a key factor that exerted downward pressure on the major. Fed Chair Jerome Powell struck a more hawkish tone on Tuesday and said that he will back interest rate increases until prices start falling back toward a healthy level. The comments reaffirmed market bets that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation and helped revive the USD demand.

The prospects for a more aggressive policy tightening by the Fed, along with the Russia-Ukraine war and extended COVID-19 lockdowns in China, raised concerns about softening global economic growth. This, in turn, took its toll on the risk sentiment, which was evident from the overnight steep decline in the US equity markets. The anti-risk flow was seen as another factor that benefitted the greenback's relative safe-haven status and exerted additional downward pressure on the perceived riskier aussie. That said, a more hawkish outlook by the Reserve Bank of Australia, signalling that a bigger interest rate hike is still possible in June amid the upside risks to inflation, extended support to the domestic currency.

Apart from this, modest USD downtick assisted the AUD/USD pair to attract some dip-buying near the mid-0.6900s during the Asian session on Thursday. The uptick pushed spot prices back above the 0.7000 psychological mark and seemed rather unaffected by mixed Australian monthly employment details. The Australian Bureau of Statistics reported the jobless rate fell to 3.9% in April, the lowest level in almost 50 years. That said, the number of employed people only increased by 4K against the 30K expected. The disappointment, to a larger extent, was offset by a sharp rise in full-time employment, by 92.4K. Bulls, however, struggled to capitalize on the move amid a generally weaker risk tone. Furthermore, elevated US Treasury bond yields should act as a tailwind for the buck and cap gains for the pair.

Market participants now look forward to the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data. Apart from this, the US bond yields and the broader market risk sentiment, would drive the USD demand and provide some meaningful impetus to the AUD/USD pair. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the pair is to the downside and any meaningful upside might still be seen as a selling opportunity.

Technical outlook

From a technical perspective, the recent bounce from the YTD low faltered on Tuesday near the 50% Fibonacci retracement level of the 0.7267-0.6829 fall. The subsequent slide below the 0.7000 mark or the 38.2% Fibo. level adds credence to the near-term negative outlook. Moreover, the pair's inability to capitalize on the intraday positive move on Thursday supports prospects for a further near-term depreciating move. Hence, some follow-through weakness below the overnight swing low, around mid-0.6900s, en-route the 23.6% Fibo. level near the 0.6930 area, remains a distinct possibility.

Failure to defend the latter would make the AUD/USD pair vulnerable to weaken further below the 0.6900 mark and test the weekly low, around the 0.6870 region. The downward trajectory could further get extended towards challenging the YTD low, around the 0.6830-0.6825 region, before the pair eventually drops to the 0.6800 mark.

On the flip side, the 50% Fibo. level, around the 0.7050 area, coincides with the 100-period SMA on the 4-hour chart. A convincing break through the said confluence hurdle will be seen as a fresh trigger for bullish traders and set the stage for an extension of the recent recovery move. Bulls might then aim to reclaim the 0.7100 mark (61.8% Fibo. level) and lift spot prices further towards the next relevant hurdle near the 0.7135-0.7140 zone.