AUD/USD surges to over one week high, beyond mid-0.6800s amid broad-based USD weakness

The AUD/USD pair catches aggressive bids on the last day of the week and rallies to over a one-week high, beyond mid-0.6800s during the early European session.

Following the previous day's directionless price moves, the US dollar comes under renewed selling pressure and retreats further from a two-decade high touched on Wednesday. This turns out to be a key factor prompting some short-covering around the AUD/USD pair and behind the strong intraday positive move of over 100 pips.

A goodish recovery in the global risk sentiment - as depicted by a generally positive tone around the equity markets - undermines the safe-haven buck. This largely offsets softer Chinese inflation figures and boosts demand for the risk-sensitive aussie. The fundamental backdrop, however, warrants some caution for bullish traders.

Investors seem convinced that the Fed will continue to tighten its policy at a faster pace to tame inflation and have been pricing in a supersized 75 bps hike at the September FOMC meeting. The bets were reaffirmed by Fed Chair Jerome Powell on Thursday, reiterating the central bank's strong commitment to bringing inflation down.

The prospects for rapid interest rate hikes, along with economic headwinds stemming from COVID-19 curbs in China and the protracted war in Ukraine, have been fueling recession fears. This could keep a lid on any optimistic move in the markets and further contribute to capping the upside for the AUD/USD pair, at least for now.

Hence, the ongoing recovery move from sub-0.6700 levels, or the lowest level since July 14 touched earlier this week, runs the risk of fizzling out rather quickly. In the absence of any major market-moving macro data from the US, the AUD/USD pair remains at the mercy of the USD price dynamics and the broader market risk sentiment.

Technical levels to watch