AUD/USD Outlook: Bearish flag breakdown seems imminent amid risk-off mood

• AUD/USD witnessed fresh selling on Friday and drifted back closer to the weekly low.
• The risk-off mood was seen as a key factor weighing on the perceived riskier aussie.
• Retreating US bond yields undermined the USD, though did little to lend any support.

The AUD/USD pair extended the overnight rejection slide from the 100-day SMA and continued losing ground through the Asian session on Friday. The downward trajectory dragged spot prices back closer to the weekly low and was sponsored by the prevalent risk-off mood, which tends to drive flows away from the perceived riskier aussie. Concerns that rising borrowing costs could dent the earnings outlook for companies took its toll on the global risk sentiment and triggered the overnight late selloff in the US equity markets.

Meanwhile, the global flight to safety, along with the prospects for a faster policy tightening by the Fed acted as a tailwind for the US dollar. In fact, investors seem convinced that the Fed would begin raising interest rates in March to contain stubbornly high inflation and have been pricing in the possibility of four rate hikes in 2022. The bets were reaffirmed by last week's data, which showed that the headline US CPI surged to the highest level since June 1982 and core CPI registered the biggest advance since 1991.

That said, the ongoing retracement slide in the US Treasury bond yields from multi-year highs held back the USD bulls from placing aggressive bets, though did little to lend any support to the major. Investors, however, might prefer to wait on the sidelines ahead of the crucial FOMC policy meeting on January 25-26. The outcome will be looked upon for clearer signals about the likely timing when the Fed will commence its rate hike cycle. This will influence the USD price dynamics and provide a fresh directional impetus to the pair.

Hence, it remains to be seen if bearish traders are able to maintain their dominant position or opt to lighten their bets amid absent relevant market-moving economic releases from the US. In the meantime, the broader market risk sentiment will drive the USD demand and allow traders to grab some short-term opportunities. Nevertheless, the pair, for now, seems to have found acceptance below the 0.7200 mark and remains on track to end the week on a weaker note.

Technical outlook

From a technical perspective, the pair was last seen flirting with short-term ascending channel support extending from the 2021 swing low. Given the recent sharp decline from the very important 200-day SMA touched in October, the mentioned channel constitutes the formation of a bearish flag pattern. Moreover, technical indicators on the daily chart have just started gaining negative traction and add credence to the negative outlook.

A convincing break below the channel support will reaffirm the bearish bias and turn the pair vulnerable. The next relevant support is pegged near the 0.7100 round figure before the pair eventually drops to the 0.7060-0.7055 intermediate support en-route the key 0.7000 psychological mark.

On the flip side, attempted recovery might now confront immediate resistance near the 0.7220-0.7230 area. A sustained strength beyond could allow bulls to make a fresh attempt to clear the 100-day SMA barrier near the 0.7280 region. This is followed by the 0.7300 mark and the monthly swing high, around the 0.7315 region, above which the momentum could get extended towards the trend-channel resistance, currently around the 0.7370 zone.