AUD/USD sticks to modest recovery gains around 0.6525-30 area ahead of US PCE Price Index

• AUD/USD bounces off a multi-day low touched on Friday amid a modest USD pullback.
• Economic woes and US debt ceiling concerns cap the upside for the risk-sensitive Aussie.
• Investors now look to the US Core PCE Price Index before placing fresh directional bets.

The AUD/USD pair stages a modest recovery from sub-0.6500 levels, or its lowest since November 2022 touched this Friday and sticks to its intraday gains through the first half of the European session. The pair is currently placed around the 0.6525-0.6530 region, up over 0.20% for the day, and for now, seems to have snapped a three-day losing streak.

The US Dollar (USD) bulls opt to take some profits off the table following the recent rally to over a two-month high and turn out to be a key factor lending some support to the AUD/USD pair. The downside for the USD, meanwhile, seems cushioned amid growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer to combat sticky inflation. Apart from this, the prevalent cautious mood could benefit the Greenback's relative safe-haven status and contribute to capping the upside for the risk-sensitive Aussie.

Against the backdrop of the recent hawkish remarks by several Fed officials, Thursday's better-than-expected US macro data reaffirms market expectations that the US central bank will continue to tighten its monetary policy. In fact, the markets have started pricing in the possibility of another 25 bps lift-off at the June FOMC meeting. This, in turn, pushed the yield on the rate-sensitive two-year US government bond to a two-and-half-month high on Thursday and supports prospects for the emergence of some dip-buying around the USD.

The market sentiment, meanwhile, remains fragile amid worries about a global economic slowdown and the US debt ceiling impasse. It is worth mentioning that both Democrats and Republican negotiators flagged little progress towards reaching a deal to raise the borrowing limit ahead of the early-June deadline when the federal government could run out of money. Moreover, Fitch placed its top-level "AAA" rating of the US on negative watch, while credit rating agency DBRS Morningstar put the US on review for a downgrade on Thursday.

Apart from this, speculations that the Reserve Bank of Australia (RBA) might refrain from hiking in June, bolstered by softer domestic data, suggests that the path of least resistance for the AUD/USD pair is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Traders now look to the US economic docket, highlighting the release of the Core PCE Price Index - the Fed's preferred inflation gauge - and Durable Goods Orders, later during the early North American session.

Technical levels to watch