Australian Dollar edges higher amid modest USD weakness; upside potential seem limited

The AUD/USD pair edges higher during the Asian session on Friday, looking to build on the overnight bounce from the lower boundary of the weekly range amid a softer US Dollar (USD). Spot prices, however, lack bullish conviction and currently trade above mid-0.6900s, up just over 0.10% for the day.

President Donald Trump said on Thursday that the US will not resume military strikes on Iran ​before the November 3 midterm congressional election, keeping a lid on crude oil prices and easing concerns over runaway inflation. Adding to this, a 30-year bond auction met with solid demand and triggered a corrective decline in US Treasury yields, which keeps the USD depressed below an 18-month top and acts as a tailwind for the AUD/USD pair.

Meanwhile, the geopolitical risk remains in play amid the US-Iran standoff over Tehran's nuclear program. In fact, state media, quoting Iran's head of the Atomic Energy Organization, Mohammad Eslami, reported that the country will not stop uranium enrichment or give up its uranium stockpile. Furthermore, the intensifying fighting between the Iran-backed Houthis in Iran and Saudi Arabia could offer some support to the safe-haven Greenback.

Adding to this, the US Federal Reserve's (Fed) hawkish stance could limit deeper USD losses and cap the AUD/USD pair amid receding bets for another interest rate hike by the Reserve Bank of Australia (RBA). This warrants some caution for bulls and makes it prudent to wait for strong follow-through buying before positioning for an extension of the pair's recovery from the 0.6900 neighborhood, or its lowest level since early July, touched last week.

AUD consolidates as UOB downplays scope for sustained downside

Strategists at UOB Group note that their previous expectation for AUD/USD to “edge higher within a 0.6965/0.6995 range” was upended when the pair slipped to a low of 0.6943. However, they stress that “despite the relatively rapid decline, there has been no clear increase in downward momentum, and a sustained decline in AUD is unlikely.” In the near term, UOB now looks for the Aussie to “trade in a range between 0.6935 and 0.6975,” suggesting a period of consolidation rather than an extension of the latest pullback.

AUD/USD 4-hour chart

Technical Analysis

The AUD/USD pair keeps a bearish near-term tone beneath the 100-period Simple Moving Average (SMA) on the 4-hour chart and a dense Fibonacci band overhead. Spot prices remain capped first by the 23.6% retracement at 0.6983, with the 38.2% level at 0.7032 reinforcing the idea of limited upside while the broader downswing from the 0.7237 high stays in play. On the downside, initial structural support emerges at the cycle low at 0.6905, where buyers may attempt to slow the decline.