• AUD/USD edged lower on Friday and moved further away from the monthly top set on Thursday.
• A generally softer risk tone turned out to be a key factor weighing on the perceived riskier aussie.
• The lack of any follow-through selling warrants caution before positioning for a further downfall.

The AUD/USD pair maintained its offered tone through the early part of the European session, albeit has managed to recover a few pips from the daily low. The pair was last seen trading around the 0.7170-75 region, down nearly 0.15% for the day.

The pair witnessed some selling on the last day of the week and extended the previous day's pullback from the monthly top, around the 0.7120-25 resistance zone. The worsening COVID-19 situation in Australia, along with a generally weaker risk tone turned out to be a key factor that drove flows away from the perceived riskier aussie.

In fact, Australia's largest state by population – New South Wales – has been reporting a sharp rise in new coronavirus cases over the past few days. Adding to this, worries about the economic risks stemming from the rapid spread of the new Omicron variant of the coronavirus continued weighing on investors' sentiment.

Meanwhile, the flight to safety assisted the US dollar to stall its post-FOMC retracement slide from the vicinity of a 16-month high. This was seen as another factor exerting pressure on the AUD/USD pair amid the Fed's hawkish outlook. It is worth mentioning that the so-called dot plot indicated at least three rate hikes next year.

The fundamental backdrop seems tilted in favour of bearish traders, though the lack of a strong follow-through selling warrants caution. In the absence of any major market-moving economic releases from the US, the broader market risk sentiment and the USD price dynamics would be looked upon for some impetus around the AUD/USD pair.

Technical levels to watch