- AUD/USD advanced for the second day in a row on Wednesday amid modest US dollar weakness.
- Risk appetite weighs on the safe haven USD and benefits the higher perceived risk AUD.
- High US bond yields should cap losses around the USD and cap the pair ahead of the FOMC decision.
The pair AUD/USD extends its steady intraday rally during the European session on Wednesday and reaches a two-day high around the 0.7235-40 region in the last hour.
After the previous day’s two-way price movement, the AUD/USD pair attracted some buying near the 0.7180 region on Wednesday and is now looking to build on momentum beyond the 100-day SMA. A positive risk tone weighed on the safe-haven US dollar and was seen as a key factor benefiting the perceived riskier Australian dollar.
In the context of hopes a possible diplomatic solution to end the war in Ukraine, news that China will keep the stock market stable boosted investor confidence. This was evidenced from a strong rally in stock marketswhich in turn diverted money flows away from traditional safe-haven assets such as the US dollar.
That said, a combination of factors should act as a tailwind for the USD and limit any significant rally for the AUD/USD pair, at least for now. Concerns about a new escalation in the conflict between Russia and Ukraine should limit optimism. This, coupled with elevated US Treasury yields, favors dollar bulls.
Markets seem convinced that recent geopolitical events could do little to stop the Fed from raising interest rates to combat high inflation. The prospects of an imminent start of the cycle of tightening monetary policies by the Fed pushed the benchmark 10-year government bond yield to the highest level since June 2019.
Investors may also prefer to wait for the outcome of the 2-day FOMC monetary policy meeting, scheduled to be announced later in the American session today. This, in turn, could prevent investors from opening aggressive bullish positions around the AUD/USD pair and position yourself for any significant upside moves in the near term.
Ahead of the key central bank event, the monthly US retail sales figures could give the AUD/USD pair some lift. Aside from this, investors will take cues from incoming news around the Russia-Ukraine war, which should influence market risk sentiment and boost safe-haven USD demand.
AUD/USD technical levels
Source: Fx Street
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