• A combination of supporting factors pushed AUD/USD to a fresh multi-week peak on Friday.
  • Speculations that the Fed could pause the rate hike cycle continued weighing on the greenback.
  • The RBA’s hawkish signal and the risk-on impulse further benefitted the risk-sensitive aussie.

The AUD/USD pair broke out of a multi-day-old trading range and shot to over a three-week high, closer to mid-0.7100s during the Asian session on Friday. A combination of factors dragged the US dollar to a fresh one-month low, which, in turn, was seen as a key factor pushing spot prices higher.

Minutes from the May 3-4 FOMC meeting released on Wednesday suggested that the Fed could pause the rate hike cycle after two 50 bps hikes each in June and July amid the worsening economic outlook. This was reinforced by an extension of the recent decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond dropped to a six-week low, which, in turn, continued exerting downward pressure on the greenback. Apart from this, the risk-on impulse - as depicted by a strong rally across the global equity markets - further undermined the safe-haven buck and benefitted the risk-sensitive Australian dollar.

The aussie drew additional support from the Reserve Bank of Australia's hawkish signal that a bigger interest rate hike is still possible in June amid the upside risks to inflation. It is worth recalling that the headline CPI rose at the fastest pace in more than 20 years and accelerated to 5.1% during the first quarter. Moreover, the global supply chain disruption resulting from the Russia-Ukraine war and the latest COVID-19 outbreak in China threaten to further fuel consumer prices. Adding to this, RBA Assistant Governor Christopher Kent had hinted at a gradual downsizing of the balance sheet, which was seen as another factor that inspired bullish traders.

It would now be interesting to see if bulls are able to capitalize on the move or opt to take some profits off the table ahead of next week's release of the quarterly Australian GDP report. This would play a key role in influencing the domestic currency ahead of the RBA monetary policy meeting on June 7. In the meantime, traders on Friday will take cues from the US Core PCE Price Index - the Fed's preferred inflation gauge - for some impetus later during the early North American session. Apart from this, the US bond yields and the broader market risk sentiment, will drive the USD demand and produce short-term trading opportunities around the AUD/USD pair.

Technical outlook

From a technical perspective, the recent strong recovery from the YTD low has been along an upward sloping channel. This points to a well-established short-term bullish trend and supports prospects for additional gains. That said, it will be prudent to wait for some follow-through buying beyond the 38.2% Fibonacci retracement level of the 0.7662-0.6829 downfall, around the 0.7150 region, before placing fresh bullish bets. The AUD/USD pair might then accelerate the momentum towards the 0.7200 round-figure mark en-route the 0.7235-0.7245 confluence hurdle. The latter comprises the 100-day SMA and the 50% Fibo. level. This is closely followed by the very important 200-day SMA, currently around the 0.7260 area, which if cleared decisively will set the stage for a further near-term appreciating move.

On the flip side, any meaningful pullback now seems to find decent support near the 0.7100 mark. Sustained weakness below might prompt aggressive technical selling and make the AUD/USD pair vulnerable to retesting the 23.6% Fibo. level, around the 0.7030-0.7025 region. Failure to defend the latter, leading to a subsequent breakthrough the 0.7000 psychological mark will shift the bias back in favour of bearish traders. Spot prices could fall to the 0.6940 intermediate support before dropping to the 0.6900 mark and the YTD low, around the 0.6830-0.6825 region touched earlier this month.

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