• AUD/USD was seen consolidating its recent gains to the highest level since early July.
• Rallying US bond yields, the cautious market mood underpinned the safe-haven USD.
• Hawkish RBA expectations helped limit the downside ahead of the US inflation data.

The AUD/USD pair extended its sideways consolidative price action and remained on the defensive, below mid-0.7500s through the mid-European session.

The pair struggled to capitalize on the previous day's positive move to the highest level since early July and edged lower on the last trading day of the week. Investors turned cautious amid growing concerns about the risk of stagflation following the release of the dismal US Q3 GDP print on Thursday. This was evident from a softer tone around the equity markets, which drove some haven flows towards the US dollar and acted as a headwind for the perceived riskier aussie.

The greenback drew additional support from a strong follow-through uptick in the US Treasury bond yields, bolstered by the prospects for an early policy tightening by the Fed. In fact, the markets now seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. This, in turn, was seen as a key factor that pushed the yield on the benchmark 10-year US government bond back above the 1.60% threshold.

Hence, the market focus will remain on Friday's release of the Fed's preferred inflation gauge – the Core PCE Price Index. This will set the tone heading into next week's FOMC meeting and provide some meaningful impetus to the AUD/USD pair. In the meantime, speculations for an interest rate hike by the Reserve Bank of Australia (RBA) might continue to lend some support to the Australian dollar and help limit the downside for the major.

Technical levels to watch