AUD/USD retreats from 0.6900 neighbourhood, bullish potential seems intact

The AUD/USD pair pulls back from the vicinity of the 0.6900 mark on Friday and eroded a part of the previous day's strong rally to a nearly one-month peak. Spot prices drop to a fresh daily low, around the 0.6860 region during the early part of the European session and for now, seem to have snapped a three-day winning streak, though the near-term bias still seems tilted in favour of bullish traders.

A modest pickup in the US Treasury bond yields assists the US Dollar (USD) to stall its recent sharp downfall to the lowest level since April 2022, which, in turn, is seen as a key factor acting as a headwind for the AUD/USD pair. Apart from this, a slightly negative tone around the US equity futures further contributes to capping the upside for the risk-sensitive Aussie. That said, growing acceptance that the Federal Reserve (Fed) is nearing the end of its policy tightening cycle should limit any meaningful USD recovery and validate the near-term positive outlook for the major.

The US economic data released this week pointed to a further moderation in inflationary pressures and should allow the Fed to soften its hawkish stance. In fact, the headline US CPI slowed to the 3% yearly rate - marking the smallest rise since March 2021, while the monthly rise in core prices was the smallest since August 2021. Moreover, the US PPI for June registered the smallest year-on-year rise since August 2020. This, in turn, reaffirmed market bets that the US central bank will keep interest rates steady after the widely anticipated 25 bps lift-off at its July monetary policy meeting.

Apart from this, hopes that China will announce more stimulus measures to support the fragile domestic economy might also lend some support to the China-proxy Australian Dollar (AUD). Adding to this, optimistic remarks by  China's Foreign Minister Wang Yi, saying that China-Australia relations have stabilised, improved and developed, supports prospects for the emergence of some dip-buying around the AUD/USD pair. Bulls, however, might wait for a sustained breakout through the 0.6900 round-figure mark before placing fresh bets and positioning for any further gains.

Market participants now look forward to the release of the Preliminary Michigan US Consumer Sentiment Index. This, along with the US bond yields and the broader risk sentiment, might influence the USD and provide some impetus to the AUD/USD pair on the last trading day of the week. Nevertheless, spot prices remain on track to register strong weekly gains as the focus now shifts to important Chinese macro data due during the Asian session on Monday.

Technical levels to watch