AUD/USD stick to modest gains above 0.6600, upsides remains capped ahead of key US data

The AUD/USD pair attracts some intraday buying near the 0.6600 round-figure mark, albeit struggles to capitalize on the move and retreats a few pips from the daily peak. Spot prices currently trade around the 0.6620-0.6625 region, up less than 0.15% for the day, and remain well within the striking distance of a nearly four-week low touched on Thursday.

Investors remain worried about economic headwinds stemming from rapidly rising borrowing costs and the fears were further fueled by rather unimpressive Chinese macro data.  In fact, the official Chinese Manufacturing PMI improved slightly to 49 for June, from 48.8 previous, though remained in contraction territory for the third straight month. Meanwhile, the gauge for the services sector surpassed consensus estimates and came in at 53.2 for the reported month, though was lower than the 54.5 recorded in May. This, in turn, acts as a headwind for the China-proxy Aussie and caps the AUD/USD pair.

The Australian Dollar (AUD) is further undermined by expectations that the Reserve Bank of Australia (RBA) will refrain from hiking interest rates in July. The bets were lifted by softer domestic data released on Wednesday, which showed that consumer inflation slowed to a 13-month low in May. The US Dollar (USD), on the other hand, stands tall near its highest level since June 13 and remains well supported by the Federal Reserve's (Fed) hawkish outlook. This, along with the upbeat US macro data released on Thursday, reaffirmed market bets for a 25-bps lift-off at the next FOMC meeting on July 25-26.

The prospects for further policy tightening by the US central bank remain supportive of a further rise in the US Treasury bond yields and continue to lend support to the USD. Market participants, however, seem reluctant to place aggressive bets and prefer to wait for the release of the US PCE Price Index, which will play a key role in influencing expectations about the Fed's future rate hike path. This, in turn, will drive the USD demand and provide a fresh directional impetus to the AUD/USD pair. Nevertheless, spot prices remain on track to register losses for the second successive week.

Technical levels to watch