AUD/USD flirts with daily low below 0.7200 amid lower risk

  • AUD/USD saw further selling on Friday and moved closer to the weekly low.
  • Risky mood was seen as a key factor weighing on the perceived riskier Aussie.
  • Falling US bond yields kept dollar bulls on the defensive and helped limit losses.

AUD/USD now appears to have entered a bearish consolidation phase and is hovering in a narrow trading band near the daily low, just below the 0.7200 mark.

After facing rejection near the 100-day SMA on Thursday, the AUD/USD pair encountered fresh supply on the last day of the week and was pressured by the dominant risk aversion theme. Investors grew nervous amid rekindled fears over strong inflationary pressures and the prospect of more rapid policy tightening from the Fed, which could weigh on the outlook for corporate earnings. The anti-risk flow was evident from weaker trading sentiment around equity markets, which was seen as a key factor weighing on the perceived riskier Aussie.

Meanwhile, the global flight to safety has driven US Treasury bond yields further from multi-year highs reached earlier this week. This, in turn, undermined the US Dollar and extended some support to the AUD/USD pair, at least for now. That said, expectations that the Fed would start raising interest rates in March to combat stubbornly high inflation continued to act as tailwinds for the greenback. Additionally, markets have priced in the possibility of a total of four rate hikes in 2022, which further favors USD bulls.

The fundamental backdrop supports the outlook for further short-term depreciation. The negative outlook is reinforced by the formation of a bearish flag pattern on the daily chart. Some follow-up selling below the weekly low around the 0.7170 area will validate the bearish bias and make the AUD/USD pair vulnerable. Investors could, however, refrain from placing aggressive bets before the FOMC meeting on January 25-26. The outcome will provide new clues on when the Fed will begin its rate hike cycle and influence USD price dynamics.

In the meantime, US bond yields will boost demand for USD. This, along with broader market risk sentiment, should allow traders to seize short-term opportunities around the AUD/USD pair in the absence of relevant economic releases from the US market.

Technical levels to watch

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