AUD / USD retreats from multi-week highs, decline appears limited

• AUD / USD stops its positive move near the 0.7200 level and is witnessing a modest pullback.
• A modest short hedging move in the USD is considered a key factor in triggering some profit taking.
• Risk appetite sentiment continues to benefit the higher perceived risk AUD and helps limit the decline.

The pair AUD/USD extends its intraday retracement from the seven-week highs and has fallen to new daily lows, around the region of 0.7265 at the start of the European session on Monday.

The pair has failed to capitalize on its initial rally and has faced rejection near the round 0.7300 level and it has seen intraday profit taking amid a modest rally in the US dollar. As investors absorb the victory of Democratic candidate Joe Biden in the US presidential election, oversold conditions on short-term charts have led to some hedging of shorts around the dollar. This, in turn, has been seen as a key factor that has put some pressure on the AUD / USD pair.

Meanwhile, the USD rally lacks an obvious fundamental catalyst and risks fading quickly. The possibility of a divided Congress now seems to fuel the speculation that the Fed will be forced to loosen its monetary policy further to support the economy amid the continued rise in COVID-19 cases. The Fed’s pessimistic expectations should prevent USD bulls from opening aggressive positions, which should finally lend some support to the AUD / USD pair and help limit deeper losses.

Aside from this, the prevailing risk appetite environment, as evidenced by a continuing strong rally in equity markets, could further benefit the perceived riskier Aussie. Therefore, any subsequent decline could be seen as a buying opportunity and is likely to remain limited amid the absence of relevant US economic releases on the first day of a new trading week.