AUD/USD clings to strong gains

A combination of factors assisted AUD/USD to gain strong positive traction on Wednesday. Hawkish RBA minutes extended support to the aussie amid a sharp USD corrective pullback. Bets for aggressive Fed rate hikes should limit the USD losses and cap the upside for the pair.

The AUD/USD pair maintained its bid tone through the early North American session and was last seen trading around the 0.7430 region, just a few pips below the weekly high.

The Reserve Bank of Australia (RBA), through its minutes from the April Board meeting, sent a hawkish message and provided a strong hint that a rate hike is coming sooner than expected. The RBA said that quicker inflation and a pickup in wages growth have moved up the likely timing of the first interest-rate increase since 2010. This, in turn, acted as a tailwind for the Australian dollar, which, along with broad-based US dollar weakness, assisted the AUD/USD pair to gain strong positive traction on Wednesday.

A sharp corrective slide in the USD/JPY pair and a softer tone surrounding the US Treasury bond yields prompted some USD profit-taking following the recent runup to the highest level since March 2020. Apart from this, the risk-on impulse – as depicted by the strong opening in the US equity markets – further underpinned demand for the safe-haven greenback and benefitted the perceived riskier aussie. The combination of factors pushed the AUD/USD pair beyond the 0.7400 mark, further away from the one-month low touched on Tuesday.

It, however, remains to be seen if bulls are able to capitalize on the move amid expectations for a more aggressive policy tightening by the Fed. In fact, the markets seem convinced that the Fed would raise interest rates at a faster pace to curb soaring inflation and have been pricing in multiple 50 bps hikes.

This should act as a tailwind for the US bond yields, which supports prospects for the emergence of some USD dip-buying. Hence, it will be prudent to wait for strong follow-through buying before positioning for a further appreciating move for the AUD/USD pair and confirming that the recent corrective slide from the YTD peak has run its course.