AUD/USD recovers further from YTD low, steadily climbs to 0.6775-80 zone amid weaker USD

The AUD/USD pair stages a recovery from sub-0.6700 levels, or a nearly two-month low touched earlier this Wednesday and scales higher through the first half of the European session. The momentum lifts spot prices to a fresh weekly high, around the 0.6775-0.6780 region in the last hour, with bulls now eyeing to test the 200-day Simple Moving Average (SMA) support breakpoint.

The upbeat Chinese data benefits the China-proxy Australian Dollar and prompts aggressive short-covering around the AUD/USD pair amid a sharp intraday US Dollar downfall. In fact, the official Chinese PMI prints for February indicated that business activity in the country rose to pre-COVID levels and that recovery in the world's second-largest economy is gaining steam. This largely offsets the softer-than-expected Australian macro data.

The Australian Bureau of Statistics reported that the economy expanded by 0.5% in the three months to December, lower than the 0.8% expected and 0.6% in the previous quarter. On an annualized basis, fourth quarter GDP rose 2.7%, as expected, though marked a significant slowdown from the 5.9% growth recorded in the previous quarter. Another report showed that Consumer Price Index (CPI) missed market estimates and decelerated from 8.4% to 7.4% in January.

The latest optimism, meanwhile, leads to a modest recovery in the global risk sentiment and weighs heavily on the safe-haven Greenback. This, in turn, is seen as another factor pushing the AUD/USD pair higher, though hawkish Fed expectations and looming recession risks could keep a lid on any further gains. The markets seem convinced that the Federal Reserve will stick to its hawkish stance for longer in the wake of stubbornly high inflation.

This remains supportive of elevated US Treasury bond yields and supports prospects for the emergence of some USD dip-buying. Furthermore, investors remain worried about economic headwinds stemming from rapidly rising borrowing costs. Adding to this, geopolitical tensions should cap any optimism in the markets and cap the risk-sensitive Aussie. This, in turn, warrants some caution before confirming that the pair has formed a near-term bottom.

From a technical perspective, the pair formed a Japanese candlestick tweezer-bottom pattern over Monday and Tuesday, and this, followed by today's strong bullish green candle suggests a strong possibility of, at least, a short-term counter-trend rally evolving. The measured move that began at the February 2 highs and has seen the AUD/USD fall over 450 pips in the month of February appears to have completed, further suggesting bears may take a breather, allowing bulls freer reign.  

Market participants now look to the US economic docket, featuring the release of the ISM Manufacturing PMI later during the early North American session. This, along with the US bond yields and the broader risk sentiment, should influence the USD price dynamics and allow traders to grab short-term opportunities around the AUD/USD pair.

Technical levels to watch