• AUD/USD struggled to preserve stronger Australian CPI-inspired gains to the 0.7200 neighbourhood.
• The prospects for rapid interest rate hikes in the US underpinned the USD and capped the upside.
• The risk-on impulse extended some support to the perceived riskier aussie and might help limit losses.

The AUD/USD pair surrendered its intraday gains and dropped to a fresh two-month low, around the 0.7120 region during the early North American session.

The initial market reaction to Wednesday's hotter-than-expected Australian consumer inflation figures faded rather quickly amid the prevalent strong bullish sentiment surrounding the US dollar. It is worth recalling that the headline Australian CPI recorded the fastest annual rise in two decades and fueled speculations that the Reserve Bank of Australia could hike interest rates from record lows as soon as next week. This, in turn, provided a goodish lift to the AUD/USD pair, though the momentum faltered just ahead of the 0.7200 round-figure mark.

On the other hand, the USD prolonged its recent runup and shot to the highest level since March 2020 amid expectations that the Fed will tighten its monetary policy at a faster pace to curb soaring inflation. In fact, the markets now expect the US central bank to raise interest rates by 50 bps when it meets on May 3-4, and again in June, July and September. Apart from this, the deteriorating global economic outlook - amid rising geopolitical tensions and strict COVID-19 lockdowns in China - further benefitted the greenback's status as the reserve currency.

The combination of factors attracted fresh sellers around the AUD/USD pair and dragged spot prices to the lowest level since February 24. That said, the risk-on impulse - as depicted by a solid rebound in the equity markets - could extend some support to the perceived riskier aussie and help limit deeper losses. Nevertheless, the fundamental backdrop favours bearish traders and the price action supports prospects for an extension of the recent sharp pullback from the YTD peak, around the 0.7660 region, touched earlier this April.

Technical levels to watch