The AUD/USD pair faced selling pressure during the Asian session on Friday, relinquishing some of its gains from the previous day’s impressive surge, which propelled it to the 0.6900 level, the highest since February 22.
Presently, the pair is trading around the 0.6870 region, marking a decline of over 0.20% for the day and signaling a pause in its six-day winning streak.
After experiencing significant losses over the past three days, the US Dollar (USD) has staged a modest recovery from its five-week low. As a result, traders have decided to lighten their bullish positions on the AUD/USD pair, particularly after its remarkable rally of over 500 pips since the beginning of the week.
Nonetheless, the upside potential for the USD appears limited due to expectations that the Federal Reserve (Fed) is nearing the peak of its policy tightening cycle. This cautious sentiment tempers any expectations of a substantial correction for the major currency pair.
It is important to note that the US central bank recently concluded its two-day policy meeting by opting to keep interest rates unchanged. However, the Fed indicated that borrowing costs may still need to rise by as much as 50 basis points by the end of the year.
Nevertheless, Thursday’s underwhelming US macroeconomic data, including Industrial Production, Weekly Jobless Claims, and Retail Sales, has raised doubts about the likelihood of additional rate hikes to combat persistently high inflation. In fact, the US Consumer Price Index (CPI) stood at 4.0% in May, double the Fed’s 2% target.
The uncertainty surrounding the Fed’s approach to rate hikes has resulted in an overnight decline in US Treasury bond yields, potentially hampering the bullish momentum for the USD.
Additionally, the Reserve Bank of Australia’s (RBA) surprise 25 basis points interest rate increase last week, coupled with a hawkish policy statement, is likely to continue supporting the Australian Dollar (AUD).
This, in turn, may contribute to limiting the downside risk for the AUD/USD pair, particularly in the absence of any significant macroeconomic data from the US. Nevertheless, spot prices remain on track to record substantial gains for the third consecutive week.
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