AUD/USD returns above 0.7200, nears 1-week highs amid modest USD pullback

• AUD/USD reversed an intraday drop to the 0.7150 area amid the onset of fresh USD selling.
• As US bond yields retreated, the less aggressive FOMC Minutes continued to weigh on the dollar.
• Geopolitical tensions, risk aversion momentum could limit the rise of the Australian dollar perceived as more risky.

The pair AUD/USD it traded with a slight positive bias during the middle of the European session and was last seen hovering around the 0.7200 level, just a few pips below a one-week high.

The pair attracted some buying on the dips on Thursday and quickly reversed an instinctive drop to an intraday low, touched around 0.7100 in reaction to reports of shelling in eastern Ukraine. The surge of fresh selling around the US dollar turned out to be one of the key factors that helped the AUD/USD pair regain some traction. The upside, however, remains limited amid the prevailing mood of risk aversion, which acted as a headwind for the perceived riskier Aussie.

The escalation of the conflict between Russia and Ukraine kept investors on edge, which was evident in a generally weaker tone in equity markets. Indeed, Russian media reported that Ukrainian military forces fired mortars and grenades at four locations in the Luhansk People’s Republic (LPR). In addition, the Organization for Security and Cooperation (OSCE) in Europe recorded multiple shelling incidents along the line of contact in eastern Ukraine in the early hours of Thursday.

Ukraine, however, denied the allegations, while the Russian Defense Ministry released a video showing a logistics unit returning to its base of operations after completing drills. Adding to this, the latest update from US satellite imaging company Maxar Technologies showed that Russia has removed some equipment from the Ukrainian border. Therefore, the market’s focus will remain on geopolitical developments, which will continue to play a key role in influencing risk sentiment.

Meanwhile, growing bets on an eventual interest rate hike by the Reserve Bank of Australia in 2022 could continue to provide support for the Australian dollar. On the other hand, the pullback in US Treasury yields coupled with the less aggressive FOMC Minutes released on Wednesday could keep USD bulls on the defensive. This, in turn, supports the prospects for a further short-term appreciation move for the AUD/USD pair, although geopolitical tensions warrant caution.

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