AUD/USD Analysis: Recent positive move might have run out of steam

• A combination of factors prompted some selling around AUD/USD on Monday.
• A fresh leg up in the US bond yields helped revive demand for the greenback.
• A softer risk tone, disappointing Chinese macro data contributed to the slide.

The AUD/USD pair consolidated its recent strong gains to five-week tops and settled nearly unchanged on Friday. The risk-on impulse in the markets continued acting as a tailwind for the perceived riskier aussie, though a modest US dollar uptick kept a lid on any meaningful gains for the major. The USD drew some support from elevated US Treasury bond yields and was further underpinned by impressive US Retail Sales figures. The data validated market expectations that the Fed will begin rolling back its massive pandemic-era stimulus in 2021.

The markets also seem to have started pricing in the possibility of an interest rate hike in 2022 amid fears about a faster-than-expected rise in inflation. This was reinforced by a fresh leg up in the US bond yields, which helped revive the USD demand on Monday and exerted some pressure on the major. Apart from this, a softer risk tone benefitted the greenback's relative safe-haven status. This, along with disappointing Chinese macro data prompted some selling around the China-proxy Australian dollar on the first day of a new trading week.

Investors remain worried that the recent widespread rally in commodity prices will stoke inflation. This, along with signs of a global economic slowdown, fueled concerns about the return of stagflation and weighed on investors' sentiment. Adding to market jitters was downbeat Chinese GDP print, which showed that growth in the world's second-largest economy decelerated to a 4.9% YoY rate during the third quarter from 7.9% previous. Adding to this, China's Industrial Production fell short of expectations and rose 3.1% YoY in September, down from 5.3%.

The corrective pullback has now dragged the pair back below the 0.7400 mark, though the continuous rise in iron ore/copper prices might help limit losses for the resources-linked aussie. Market participants now look forward to the US economic docket, featuring the release of Industrial Production data later during the early North American session. Traders will further take cues from the US bond yields and the broader market risk sentiment, which might influence the USD price dynamics and produce some short-term opportunities around the major.

Technical outlook

Looking at the technical picture, the formation of a Doja candlestick pattern on Friday pointed to indecision between bullish and bearish traders. Adding to this, the pair‘s inability to find acceptance above the 0.7400 mark and the subsequent pullback suggests that the recent strong rally witnessed since the beginning of this month has run out of steam. That said, it will still be prudent to wait for a strong follow-through selling before confirming that the pair has topped out in the near term and positioning for any meaningful corrective pullback.

From current levels, the 0.7370-65 region seems to protect the immediate downside ahead of the 0.7320-15 strong resistance breakpoint turned support. This is closely followed by the 0.7300 mark, which if broken decisively will shift the bias in favour of bearish traders. The pair might then accelerate the fall towards the next relevant support near the 0.7225 region before eventually dropping to the 0.7200 round-figure mark.

On the flip side, the 0.7400-10 region now seems to have emerged as immediate strong resistance. Some follow-through buying has the potential to push the pair towards an intermediate resistance near the 0.7440 zone. The momentum could further get extended towards testing September monthly swing highs, around the 0.7475-80 region.