The AUD/USD pair witnessed renewed buyer interest on Friday, recovering a significant portion of its previous day’s decline to reach the 0.6600 level, which marked a nearly three-week low.
Presently, during the early European session, the pair maintains modest intraday gains and resides near the upper range of its daily performance, situated around the mid-0.6600s.
The US Dollar (USD) retraced from its peak level since March 20, playing a pivotal role in supporting the AUD/USD pair. The overall positive sentiment in equity markets triggered profit-taking on the safe-haven US currency, thereby favoring the risk-sensitive Australian dollar.
However, the decline in the USD appears to have limited downside potential due to growing expectations that the Federal Reserve (Fed) will maintain higher interest rates for an extended period. Additionally, optimism surrounding a potential resolution of the US debt ceiling issue has contributed to this sentiment.
Dallas Fed President Lorie Logan stated on Thursday that the current economic data does not justify postponing an interest rate increase at the upcoming policy meeting in June. This aligns with the recent hawkish remarks from various Fed officials, leading investors to revise their expectations for rate cuts later this year.
Furthermore, Kevin McCarthy, a prominent US congressional Republican, expressed confidence in the progress of negotiations and anticipated a bill to raise the government’s $31.4 trillion debt ceiling to be presented on the House floor next week.
Consequently, US Treasury bond yields remain elevated. Coupled with Thursday’s positive US macroeconomic data, this should continue to support the USD. Furthermore, concerns about global economic growth, particularly in China, have bolstered the Greenback’s status as a relative safe haven.
Notably, recent data from China revealed a weaker-than-expected performance of the world’s second-largest economy in April. Thus, caution is warranted before placing overly optimistic bets on the AUD/USD pair.
Traders may adopt a wait-and-see approach in anticipation of Fed Chair Jerome Powell’s upcoming speech during the US session. This address will be closely scrutinized for fresh insights into the central bank’s future policy decisions, significantly impacting the short-term dynamics of the USD and potentially providing new direction for the AUD/USD pair.
However, given the prevailing fundamental backdrop, the path of least resistance for spot prices appears to be on the downside, with potential upward movements susceptible to selling pressure.
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