• AUD/USD retreats further from a three-week high and is pressured by sustained USD buying.
• The Fed's hawkish outlook remains supportive of rising US bond yields and underpins the buck.
• A softer risk tone also contributes to driving flows away from the risk-sensitive Australian Dollar.

The AUD/USD pair extends the previous day's sharp retracement slide from levels just above the 0.6500 psychological mark, or a nearly three-week high, and continues losing ground through the Asian session on Thursday. The downward trajectory drags spot prices to the lower end of the weekly range, around the 0.6420-0.6415 region, and is sponsored by sustained US Dollar (USD) buying.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs closer to a six-month peak touched last week and remains well supported by the Federal Reserve's (Fed) hawkish outlook. As was widely anticipated, the US central bank decided to leave interest rates unchanged at the end of a two-day monetary policy meeting on Wednesday. The Fed, however, left the door open for one more 25 bps lift-off in 2023 and maintained its forecast for rates to peak at 5.5% to 5.75% by the end of this year. Moreover, policymakers now see the benchmark rate at 5.1% next year, suggesting just two rate cuts in 2024 as compared to four rate cuts projected previously.

This reaffirms a higher-for-longer narrative pushes the yield on the rate-sensitive two-year US government bond to a 17-year high. Furthermore, the benchmark 10-year yield has climbed to its highest since late 2007, which, along with a softer risk tone, is seen underpinning the safe-haven buck and exerting additional pressure on the risk-sensitive Australian Dollar (AUD). Apart from this, China's conservative approach to introducing more stimulus measures and speculations that the Reserve Bank of Australia (RBA) might have ended its rate-hiking cycle contribute to the offered tone surrounding the AUD/USD pair. This, in turn, suggests that the path of least resistance for spot prices is to the downside.

Even from a technical perspective, the formation of a bearish flag pattern on short-term charts validates the negative outlook for the AUD/USD pair. That said, it will be prudent to wait for a sustained break below the 0.6400 mark before positioning for any further depreciating move. Market participants now look to the US economic docket – featuring the usual Initial Weekly Jobless Claims, Philly Fed Manufacturing Index and Existing Home Sales data. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and produce short-term trading opportunities around the AUD/USD pair ahead of Friday's release of flash PMI prints.

Technical levels to watch