AUD/USD moves closer to 0.7100 amid risk-on, eyes two-month high set on Wednesday

The AUD/USD pair attracts some dip-buying near the 0.7060 region on Thursday and climbs to a fresh daily high during the early European session. Spot prices, however, remain below the 0.7100 mark and a two-month high touched in the aftermath of softer US consumer inflation figures on Wednesday.

The prevalent risk-on mood acts as a headwind for the safe-haven US dollar and turns out to be a key factor offering some support to the AUD/USD pair. The weaker-than-expected US CPI report pushed back expectations for a more aggressive policy tightening by the Fed and boosted investors' confidence. This is evident from a generally positive tone around the equity markets, which tends to benefit the risk-sensitive aussie.

That said, growing worries about a global economic downturn, along with the US-China tensions over Taiwan, could keep a lid on the optimistic move. Moreover, the overnight hawkish remarks by several Fed officials should help limit deeper losses for the greenback and cap gains for the AUD/USD pair. This, in turn, warrants caution for bullish traders and positioning for any further appreciating move, at least for now.

In fact, Chicago Fed President Charles Evans noted that inflation is still unacceptably high and expects Fed to continue to raise the interest rate to 3.25%-3.50% by year-end, and 3.75%-4.00% by the end of next year. Adding to this, Minneapolis Fed President Neel Kashkari said that the Fed is far away from declaring victory on inflation and recommended the rate at 3.9% by the end of this year in the June economic projections.

Furthermore, the Fed is still expected to hike interest rates by at least 50 bps at the September policy meeting. This further makes it prudent to wait for sustained strength beyond the 0.7100 round-figure mark before placing fresh bullish bets around the AUD/USD pair. Market participants now look forward to the release of the US Producer Price Index (PPI) for a fresh impetus later during the early North American session.

Technical levels to watch