AUD/USD clings to gains near session tops, around 0.7730-35 region

The AUD/USD pair maintained its bid tone through the early European session and was last seen hovering near the top end of its intraday trading range, around the 0.7730-35 region.

Following an early dip to one-and-half-week lows, the pair attracted some fresh buying near the 0.7690 region and has now recovered a major part of the previous day's negative move. The uptick was sponsored by the emergence of some fresh selling around the US dollar, which remained depressed amid speculations that the Fed will keep interest rates low for a longer period.

The market now seems convinced with the view that any spike in inflation is likely to be temporary and have been scaling back their expectations for an earlier than anticipated Fed lift-off. This was evident from the fact that the USD bulls largely shrugged off Thursday's upbeat US Jobless Claims data and also seemed unimpressed by a modest uptick in the US Treasury bond yields.

That said, a softer tone around the equity markets might keep a lid on any runaway rally for the perceived riskier Australian dollar. Investors turned cautious amid renewed fears about another dangerous wave of coronavirus infections in some countries. The risk sentiment was further hit by reports that the Biden administration is seeking an increase in the capital gains tax.

Even from a technical perspective, the recent price action constitutes the formation of a bearish head and shoulders on intraday charts. This makes it prudent to wait for some strong follow-through buying before positioning for any further gains. Conversely, sustained weakness below the 0.7700-7690 region will reaffirm the bearish pattern and turn the AUD/USD pair vulnerable to slide further.

Market participants now look forward to the US economic docket, highlighting the release of the flash Manufacturing and Services PMI prints. The data will offer fresh insight into how the economy is performing. This, along with the broader market risk sentiment, should provide some impetus to the AUD/USD pair and allow traders to grab short-term opportunities on the last day of the week.

Technical levels to watch