• AUDUSD rallies to over a two-month high amid the emergence of fresh USD selling.
• Bets for less aggressive Fed rate hikes and the risk-on mood undermines the buck.
• A sustained strength beyond the 100-day SMA supports prospects for further gains.

The AUDUSD pair catches fresh bids on Tuesday and climbs to over a two-month high during the early part of the European session. The momentum lifts spot prices beyond mid-0.6700s in the last hour, confirming a bullish breakout through the 100-day SMA resistance.

The US Dollar comes under some renewed selling pressure and drops to its lowest level since mid-August, which, in turn, is seen as a key factor acting as a tailwind for the AUDUSD pair. A surprise drop in the US consumer inflation in October lifted hopes for smaller rate hikes by the Federal Reserve. This is evident from sliding US Treasury bond yields, which continue to weigh on the buck.

Apart from this, a positive risk tone - as depicted by a fresh leg up in the equity markets - is seen as another factor undermining the safe-haven greenback and benefitting the risk-sensitive Aussie. It, however, remains to be seen if the AUDUSD pair is able to capitalize on the strength or if the momentum runs out of steam at higher levels amid mixed signals from China.

Economic data released earlier today showed industrial output slowed to 5.0% YoY in October from 6.3% previous. Adding to this, Chinese Retail Sales unexpectedly fell by 0.5% in October - marking the first drop since May. This, along with fears that China could impose additional lockdowns in some cities, overshadows the optimism over an eventual scaling back of restrictive measures.

This, in turn, warrants caution before positioning for any further appreciating move. Nevertheless, a sustained move beyond a technically significant 100-day SMA favours bullish traders. Market participants now look to the US macro data - the Empire State Manufacturing Index and Producer Price Index (PPI) - for some impetus later during the early North American session.

Technical levels to watch