AUD/USD Analysis: Weakness below 0.6800 mark would be seen as fresh trigger for bears

• A combination of factors dragged AUD/USD to over a two-year low on Friday.
• Aggressive Fed rate hike bets revived the USD demand and exerted pressure.
• Recession fears weighed on the risk sentiment and contributed to the decline.

The AUD/USD pair struggled to capitalize on the previous day's modest bunce and came under intense selling pressure during the Asian session on Friday. The downward trajectory dragged spot prices to the 0.6800 neighbourhood, or the lowest level since June 2020 and was sponsored by broad-based US dollar strength. As investors looked past Thursday's softer US PCE inflation data, the prospects for more aggressive Fed rate hikes assisted the USD to attract fresh buying on the last day of the week.

The bets were reaffirmed by Fed Chair Jerome Powell's comments earlier this week, saying that the US central bank remains focused on getting inflation under control. Speaking at the ECB Forum in Sintra, Powell added that the market pricing is pretty close to the dot plot and that the US economy is well-positioned to handle tighter policy. Apart from this, the prevalent risk-off environment was seen as another factor that drove haven flows towards the greenback and weighed on the risk-sensitive aussie.

The market sentiment remains fragile amid concerns that rapidly rising interest rates and tightening financial conditions would pose challenges to global economic growth. Apart from this, a further escalation in tensions between the West and Russia - in response to the latter's invasion of Ukraine - has stoked fears of a possible recession. This was evident from a sea of red across the equity markets, which forced investors to take refuge in traditional safe-haven assets, including the buck.

The bearish pressure surrounding the AUD/USD pair remained unabated following the release of a better-than-expected Chinese manufacturing sector activity report. In fact, the Caixin/Markit Manufacturing PMI rose from 48.1 in the previous month to 51.7 in June, marking the first expansion in four months. The data, however, did little to provide any respite to the China-proxy Australian dollar. With the USD price dynamics turning out to be an exclusive driver, traders now look forward to the US ISM Manufacturing PMI, due later during the early North American session, for a fresh impetus.

Technical outlook

From a technical perspective, acceptance below mid-0.6800s could be seen as a fresh trigger for bearish traders and supports prospects for further losses. Some follow-through selling below the 0.6800 mark would reaffirm the negative bias and accelerate the decline towards the next relevant support near the 0.6750 region. The AUD/USD pair might eventually fall to the 0.6700 round-figure mark en-route the 0.6680-0.6675 support zone.

On the flip side, any meaningful recovery beyond the 0.6850 region might still be seen as a selling opportunity and remain capped near the 0.6900 round-figure mark. Sustained strength beyond might trigger a short-covering bounce, though the attempted recovery runs the risk of fizzling out rather quickly near the 0.6950-0.6960 supply zone. The latter should act as a pivotal point, which if cleared decisively might negate the bearish bias.