AUD/USD returns modest intraday gains, holds above 0.7000

• AUD/USD fails to sustain its modest intraday gains and pulls back from the 0.7050 region.
• Looming recession risks weigh on investor sentiment and constrain the risk-sensitive AUD.
• Expectations of lower Fed rate hikes weigh on the USD and should help limit the pair’s losses.
• Investors now await US economic data ahead of Australian CPI.

The pair AUD/USD it fails to capitalize on its modest intraday gains and falls back from the daily high, around the 0.7050 zone, reached at the beginning of the European session. However, the pair manages to stay above the psychological level of 0.7000 and it seems willing to prolong the recent appreciation movement of the last three months.

A softer risk tone, amid global recession risks, helps the safe-haven US dollar trim some of its intraday losses and acts as a headwind for AUD/USD. That being said, it remains difficult for the dollar to rally significantly in a context of growing acceptance that the Fed will soften its hawkish stance. Indeed, markets have been pricing in a higher probability of a 25 basis point Fed rate hike in February, which is keeping US Treasury yields depressed and should constrain the dollar.

Furthermore, the increase in the chances of a further rate hike by the Reserve Bank of Australia (RBA) in February could continue to support the Australian dollar and limit the fall in the AUD/USD pair. Expectations were boosted by Australian consumer inflation figures released earlier this month, which showed that the general CPI accelerated again reaching a year-on-year rate of 7.3% (highest in 32 years) in November. Therefore, markets will continue to watch Australian CPI for the fourth quarter, which is due to be released on Wednesday.

Meanwhile, traders will follow the US economic calendar, which will see the release of preliminary PMI data and the Richmond Fed Manufacturing Index. This, along with US bond yields and broader risk sentiment, will influence USD price dynamics and provide some momentum for AUD/USD. However, the fundamental background continues to tilt in favor of the bulls, suggesting that any pullback could continue to be seen as a buying opportunity and remain limited.

AUD/USD technical levels