AUD/USD clings to gains near mid-0.7200s, upside seems limited

• AUD/USD regained some traction on Wednesday and recovered a part of the overnight losses.
• Retreating US bond yields kept the USD bulls on the defensive amid improving risk sentiment.
• Prospects for an early Fed rate hike should help limit the USD losses and cap gains for the pair.

The AUD/USD pair held on to its modest intraday gains heading into the European session and was last seen hovering near daily tops, around the 0.7250-55 region.

The pair managed to attract some buying during the early part of the trading action on Wednesday and recover a part of the previous day's losses. The US dollar was seen consolidating the previous day's strong move up to the highest level since November 2020 amid a modest pullback in the US Treasury bond yields. Adding to this, a slight improvement in the global risk sentiment further undermined the safe-haven greenback and extended some support to the perceived riskier aussie.

That said, worries about potential risks from the debt crisis at China Evergrande Group, along with the intensifying energy crisis in Europe and China could keep a lid on the optimistic move. Apart from this, prospects for an early policy tightening by the Fed should act as a tailwind for the greenback. The combination of factors, in turn, might cap the AUD/USD pair, warranting some caution for aggressive bullish traders and positioning for any meaningful appreciating move.

It is worth recalling that the Fed hinted that it will soon begin tapering its asset purchases and the dot plot indicated policymakers' inclination to raise rates in 2022. The expectations were reinforced by comments from a slew of influential FOMC members. Moreover, Fed Chair Jerome Powell – testifying before the Senate Banking Committee – said that inflation is more concerning than earlier this year, which might add to the recent upward pressure on the US bond yields.

Market participants now look forward to Fed Chair Jerome Powell's remarks at the ECB Forum on Central Banking later during the North American session. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the AUD/USD pair. Traders will further take cues from the broader market risk sentiment for some short-term trading opportunities around the major.

Technical levels to watch