AUD/USD remains on the defensive, holds comfortably above 0.6900 amid modest USD weakness

The AUD/USD pair struggled to capitalize on Friday's goodish rebound from sub-0.6900 levels and met with a fresh supply on the first day of a new week. The pair maintained its offered tone through the first half of the European session and was last seen trading around the 0.6920 area, just a few pips above the daily low.

The recent slump in commodity prices is a key factor undermining the resources-linked Australian dollar. Another factor adding downward pressure on the China-proxy aussie is the fact that the Chinese economy is facing headwinds amid the resurgence of COVID-19 cases. That said, a combination of factors has also held back traders from placing aggressive bearish bets on the AUD/USD pair, helping to limit deeper losses.

Investors have turned optimistic amid hopes that inflation is nearing its peak and now seem to have scaled back their expectations for more aggressive rate hikes by the Fed. This was reinforced by a sharp corrective pullback in the US Treasury bond yields, which kept the US dollar bulls on the defensive. Apart from that, a generally positive risk tone around the equity markets further undermined the safe-haven greenback and offered some support to the risk-sensitive aussie.

From a technical perspective, the emergence of fresh selling at higher levels suggests that the recent downward trajectory witnessed since the beginning of this month is still far from being over. Hence, a subsequent fall back towards the monthly low, around the 0.6850 region, now looks like a distinct possibility. The AUD/USD pair could extend the fall further and eventually drop to challenge the YTD low, around the 0.6830-0.6825 region touched in May.

Market participants now look forward to the US economic docket, featuring the release of the Durable Goods Orders and Pending Home Sales data later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the AUD/USD pair. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the major.

Technical levels to watch