• AUD/USD jumped to over three-month tops during the Asian session on Wednesday.
  • The dominant risk-on mood boosted the perceived riskier aussie amid a weaker USD.
  • Diverging Fed-RBA monetary policy outlooks might cap any further gains for the pair.

The AUD/USD pair prolonged its recent bullish trajectory that has been underway since late September and shot to the highest level since July 7 during the Asian session on Wednesday. The recent widespread rally in commodity prices continued acting as a tailwind for the resource-linked Australian dollar. Apart from this, a weaker US dollar – weighed down by the dominant risk-on mood amid rising optimism about the global economy – provided an additional boost to the perceived riskier aussie.

Meanwhile, the prospects for an early policy tightening by the Fed continued driving the US Treasury bond yields higher. The FOMC minutes released last Wednesday reaffirmed that the Fed remains on track to begin tapering its bond purchases in 2021. This, along with speculations for a potential Fed rate hike in 2022 amid worries about rising inflationary pressures, pushed the yield on the benchmark 10-year US government bond to 1.672%, a high last seen in May. This might help limit the USD losses.

On the other hand, the Reserve Bank of Australia (RBA) does not expect to raise interest rates until 2024. The divergence in guidance on the interset rate outlook by the Fed and RBA could hold investors from placing fresh bullish bets around the major. This, along with overstretched conditions on short-term charts should cap gains, at least for the time being. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.

In the absence of any major market-moving economic releases from the US, traders will take cues from scheduled speeches by Chicago Fed President Charles Evans and Fed Governor Randal Quarles. This, along with the US bond yields, will influence the USD price dynamics. Apart from this, the broader market risk sentiment might further contribute to produce some meaningful trading opportunities around the pair.

Technical outlook

From a technical perspective, the recent breakout through a short-term descending trend-line resistance extending from late June was seen as a key trigger for bullish traders. A subsequent move beyond September monthly swing highs might have already set the stage for additional gains. Some follow-through buying beyond the 0.7500 mark will reaffirm the constructive set-up and pave the way for a move towards reclaiming the 0.7600 round figure. The 0.7525 region, followed by the 0.7560-70 area could act as intermediate resistance levels on the way up. 

On the flip side, any meaningful fall now seems to find decent support near mid-0.7400s. Sustained weakness below might prompt some long-unwinding and accelerate the corrective slide towards the 0.7410-0.7400 horizontal support. The latter should act as a strong near-term base for the major, which if broken decisively will set the stage for a deeper pullback.

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