AUD/USD pulls back from 2-week highs and returns below 0.6700

• AUD/USD continues its struggle to find acceptance above 0.6700 on Friday.
• The risk-off state revives demand for the safe-haven dollar and limits the risk sensitivity of the Australian dollar.
• Expectations of a less aggressive Fed work against the dollar and provide some support.

The pair AUD/USD pares some of its intraday gains to a 2-week high and falls back below 0.6700 in the American session on Friday.

A further drop in equity markets helps the safe-haven dollar bounce off the daily low and acts as a headwind for the risk-sensitive Australian dollar. Despite multi-billion dollar lifelines for troubled US and European banks, investors remain concerned about widespread contagion and the possibility of a full-blown global banking crisis. This, coupled with fears of an imminent recession, weighs on global risk sentiment and drives some safe haven flows into the dollar.

That being said, the fall in US Treasury yields continues to weigh on the dollar and continues to support the intraday bidding tone around the AUD/USD pair. Against the backdrop of the global flight to safety, expectations that the Fed will take a less aggressive stance in the face of worsening economic conditions are dragging US bond yields lower. In fact, markets are pricing in a higher probability of a 25 basis point rate hike at the next FOMC policy meeting on March 21-22.

This follows the bankruptcy last week of two US banks – Silicon Valley Bank and Signature Bank – and warrants some caution on the part of dollar bulls. Traders, however, would prefer to stay on the sidelines awaiting the key central bank event next week. Meanwhile, the recent dovishness by the Reserve Bank of Australia (RBA), signaling that it may be nearing the end of its rate hike cycle, could continue to cap AUD/USD gains, at least for now. .

US Treasury yields and risk sentiment in general could influence USD price dynamics and give the AUD/USD pair some momentum. However, the pair manages to stay in positive territory for the second day in a row and remains on track to end the week in the positive, reversing much of last week’s losses to its lowest level since November 2022.

Technical levels to watch