AUD/USD Outlook: Upside potential seems limited, focus shifts to Powell's Senate hearing

• A combination of factors led to an intraday slide of over 50 pips for AUD/USD on Monday.
• Hawkish Fed expectations revived the USD demand and exerted some downward pressure.
• A turnaround in the risk sentiment also drove flows away from the perceived riskier aussie.
• Upbeat domestic data assisted the Australian dollar to regain positive traction on Tuesday.

The AUD/USD pair gained some positive traction on Monday, albeit struggled to capitalize on the move or find acceptance above the 0.7200 mark and retreated over 50 pips from the daily high. The US dollar was back in demand amid growing acceptance for a faster policy tightening by the Fed, reaffirmed by the recent strong rally in the US Treasury bond yields. In fact, the money markets have fully priced in the possibility of an eventual Fed lift-off in March and are anticipating four interest rate hikes by the end of 2022.

The market bets were boosted by Friday's release of the US jobs report, which highlighted a tight labour market. The unemployment rate dropped more than expected to 3.9% and wages recorded another month of strong growth, offsetting the disappointment from the headline NFP print. This, in turn, pushed the yield on the benchmark 10-year Treasury note to 1.80% for the first time since January 2020. Adding to this, the US 2-year and 5-year notes, which are highly sensitive to rate hike expectations, climbed to a two-year high and underpinned the USD.

Meanwhile, an extended sell-off in the US bond market tempered investors' appetite for riskier assets and led to the overnight corrective pullback in the US equity markets. This was seen as another factor that benefitted the greenback's relative safe-haven status and drove flows away from perceived riskier currencies, including the aussie. The pair finally settled near the lower end of its daily trading range, around mid-0.7100s and reversed Friday's modest uptick, though managed to attract fresh buying during the Asian session on Tuesday.

The Australian dollar drew some support from upbeat domestic Retail Sales data, which recorded a stronger than expected growth for the second month in November. Adding to this, the country's trade balance figures came in to show that imports jumped 6% during the reported month and further pointed to strong domestic spending. Apart from this, retreating US bond yields acted as a headwind for the greenback and provided an additional lift to the major. That said, any meaningful upside still seems elusive ahead of the key event/data risks.

Market participants now look forward to Fed Chair Jerome Powell's nomination hearing later during the US session for fresh clues on the timing and pace of policy normalisation. The focus will then shift to the release of the latest US consumer inflation figures on Wednesday. This will play a key role in influencing the USD price dynamics and provide a fresh directional impetus to the pair. In the meantime, the US bond yields will drive the USD demand, which, along with the broader market risk sentiment, might produce some trading opportunities.

Technical outlook

From a technical perspective, last week's sustained break below a one-month-old ascending trend-line supports prospects for an extension of the recent rejection slide from the 100-day SMA. Hence, any subsequent move up towards the 0.7215-20 region might still be seen as a selling opportunity. This, in turn, should cap the upside near the 0.7255-60 resistance zone. This is followed by the 100-DMA barrier, currently around the 0.7285-90 region, which if cleared decisively will negate the negative bias. The pair might then climb to the next relevant hurdle near the 0.7340-45 region en-route the 0.7375-80 zone and the 0.7400 round-figure mark.

On the flip side, the 0.7150-45 region now seems to have emerged as immediate support. This is followed by Friday's swing low, around the 0.7130 region, below which the pair might accelerate the slide towards the 0.7100 mark. Some follow-through selling could pave the way for a further near-term depreciating move back towards challenging the key 0.7000 psychological mark, or the 2021 low.