• AUD/USD climbs to a three-week high and is supported by sustained selling around the USD.
• The softer US CPI reaffirms that the Fed will end its rate-hiking cycle and weighs on the buck.
• A positive risk tone also undermines the safe-haven USD and benefits the risk-sensitive Aussie.

The AUD/USD pair edges higher during the Asian session on Thursday and looks to build on the overnight breakout rally through a technically significant 200-day Simple Moving Average (SMA). Spot prices currently trade near a three-week top and remain well supported by the prevailing US Dollar (USD) selling bias, with bulls now awaiting a sustained strength beyond the 0.6800 mark before placing fresh bets.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, plunges to its lowest level since April 2022 in the aftermath of softer US consumer inflation figures released on Wednesday. In fact, the headline CPI rose 0.3% in June, while the monthly rise was the smallest since August 2021. Furthermore, the yearly rate decelerated to 4.8% - also the smallest increase in more than two-year. Further moderation in consumer prices reinforced speculations that the Federal Reserve (Fed) will hike interest rates only one more time this year.

Expectations that the Fed is nearing the end of its policy tightening cycle lead to a further decline in the US Treasury bond yields and continue to weigh on the buck, which turns out to be a key factor acting as a tailwind for the AUD/USD pair. Apart from this, the prevalent risk-on mood - as depicted by an extension of the recent rally in the equity markets - is also seen undermining the safe-haven Greenback and benefitting the risk-sensitive Aussie. This, along with the overnight sustained strength beyond the very important 200-day SMA favours bullish traders.

The outlook is reinforced by the fact that technical indicators on the daily chart are holding comfortably in the positive territory and are still far from being in the overbought zone. That said, the Relative Strength (RSI) on hourly charts is flashing slightly overbought conditions and holding back bulls from placing fresh bets around the AUD/USD pair or positioning for any further appreciating move. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside.

Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some impetus to the AUD/USD pair ahead of the key Chinese macro data next Monday.

Technical levels to watch