- AUD/USD witnesses an aggressive short-covering move on Friday and rises to a one-week high.
- Risk appetite pulls the USD off its two-decade highs and benefits the risk-sensitive AUD.
- Expectations of aggressive rate hikes from the Fed and fears of a recession could cap dollar losses and cap gains for the pair.
The pair AUD/USD receives aggressive purchases on the last day of the week and recovers to reach fresh 1-week highs above 0.6850 region during the European session.
Following the directionless price movements of the previous day, US dollar comes under renewed selling pressure and retraced further from the two-decade highs reached on Wednesday. This turns out to be a key factor driving some short covering around the AUD/USD pair and is behind the strong positive intraday move of over 100 pips.
A good recovery in risk sentiment globally, as reflected by the positive tone in equity markets, weighs on the safe-haven US dollar. This largely offsets softer Chinese inflation numbers and boosts demand for the risk-sensitive Aussie. However, the fundamental background warrants some caution for the bulls.
Investors seem convinced that the Fed will continue to tighten monetary policy at a faster pace to control inflation and have been pricing in a 75 basis point hike at the September FOMC meeting. The expectations were reaffirmed by the president of the Fed, Jerome Powell, reiterating on Thursday the central bank’s firm commitment to reduce inflation.
The prospect of rapid interest rate hikes, coupled with economic headwinds from the COVID-19 outbreaks in China and the protracted war in Ukraine, have fueled fears of a recession. This could curb any bullish moves in the markets and help limit the AUD/USD’s gains, at least for now.
Therefore, the current recovery move from levels below 0.6700, or the lowest level since July 14 touched earlier this week, is at risk of fading rather quickly. In the absence of any major macro data out of the US, the AUD/USD pair remains at the mercy of dollar price dynamics and broader market risk sentiment.
AUD/USD technical levels
Source: Fx Street
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