AUD/USD Outlook: Downside potential seems limited, 0.7420-15 area holds the key

• AUD/USD witnessed a turnaround of around 90 pips from multi-month tops touched on Thursday.
• The cautious market mood, elevated US bond yields revived the USD demand and exerted pressure.
• The lack of any strong follow-through selling warrants some caution for aggressive bearish traders.

The AUD/USD pair witnessed an intraday turnaround from the 0.7535 area, or the highest level since early July touched earlier on Thursday amid a goodish pickup in the US dollar demand. Fresh worries about contagion from China Evergrande's debt crisis weighed on investors' sentiment and drove some haven flows towards the greenback. Apart from this, a fresh leg up in the US Treasury bond yields was seen as another factor that underpinned the USD. In fact, the yield on the benchmark 10-year US government bond rose to five-month tops, around 1.683% in the wake of growing market expectations for an early policy tightening by the Fed.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. The speculations were reinforced by comments from Fed Governor Christopher Waller, noting that the US central bank may have to act faster if inflation continues to run high through the remainder of this year. Moreover, Atlanta Fed President Raphael Bostic told CNBC that he has pencilled in a rate increase in the late third, or maybe the early fourth quarter of 2022. This comes on the back of better-than-expected US jobs and housing market data, which remained supportive of the bid tone surrounding the greenback.

The US Weekly Initial Jobless Claims dropped to a 19-month low level of 290K during the week ended October 15 and pointed to a tightening labor market. This, to a larger extent, negated a weaker than anticipated Philly Fed Manufacturing Index, which fell to 23.8 for the current month from 30.7 in September. Separately, Existing Home Sales surge to 6.29 million units in September, marking a growth of 7% MoM and an eight-month high. This, along with a corrective pullback in commodity prices, weighed on the resource-linked Australian dollar and further contributed to the pair's intraday decline of nearly 90 pips.

The pair touched three-day lows during the Asian session on Friday, though lacked any follow-through selling and so far, has managed to hold its neck just above mid-0.7400s. Reports that China Evergrande made funds available for a bond coupon to a trustee account on Thursday helped ease market jitters. This was evident from signs of stability in the equity markets, which extended some support to the perceived riskier aussie. Adding to this, stronger Australian PMI prints helped offset RBA Governor Philip Lowe's dovish remarks, saying that the current rise in inflation is unlikely to sustain unless it led to higher wages growth.

Market participants now look forward to the release of flash US PMIs for a fresh impetus later during the early North American session. Traders will further take cues from the US bond yields and the broader market risk sentiment for some short-term opportunities on the last day of the week.

Technical outlook

From a technical perspective, bearish traders need to wait for some follow-through below mid-0.7400s before confirming that the pair has topped out and placing aggressive bets. The next relevant support is pegged near the 0.7420-15 strong horizontal resistance breakpoint. This is closely followed by the 0.7400 round figure, which if broken decisively should pave the way for an extension of the corrective slide. The pair might then accelerate the fall towards intermediate support near the 0.7345 region before eventually dropping to the 0.7300 mark.

On the flip side, the 0.7500-10 area could act as an immediate hurdle ahead of multi-month tops, around the 0.7530-35 region. A sustained move beyond has the potential to lift the pair further towards July monthly swing highs, around the 0.7600 mark. Some follow-through buying above the 0.7615 region, or highs touched on June 25 will be seen as a fresh trigger for bullish traders and set the stage for the continuation of the recent bullish momentum witnessed over the past four weeks or so.