• A combination of factors assisted AUD/USD to reverse an early dip to the 0.7185 area.
• Easing Omicron fears benefitted the perceived riskier aussie amid subdued USD demand.
• The Fed’s hawkish outlook should limit the USD losses and cap the upside for the major.

The AUD/USD pair reversed an early dip and was last seen trading near the monthly top, around the 0.7215-20 region heading into the European session.

The pair attracted fresh buying near the 0.7185 region on Thursday and is now looking to build on this week's goodish rebound from the 0.7080 area, or the lowest level since December 7. Easing concerns that the new fast-spreading variant could derail the economic recovery turned out to be a key factor that acted as a tailwind for the perceived riskier aussie. This, along with subdued US dollar demand, extended some support to the AUD/USD pair.

Investors turned optimistic after reports indicated that the current vaccines may be more effective than first thought in fighting the new COVID-19 variant. Moreover, news from a South African study suggested reduced risks of hospitalisation and severe disease in people infected with Omicron compared with the Delta strain. This, in turn, led to a fresh wave of a risk-on trade in the equity markets, which undermined the safe-haven greenback.

That said, the Fed's hawkish outlook should help limit any meaningful downside for the USD and cap the upside for the AUD/USD pair, at least for the time being. It is worth recalling that the so-called dot-plot indicated that the Fed could hike interest rates at least three times next year. The mixed fundamental backdrop might hold back traders from placing fresh bullish bets around the AUD/USD pair amid thin liquidity ahead of the year-end holiday season.

Market participants now look forward to the US economic docket – highlighting the release of Core PCE Price Index and Durable Goods Orders data later during the early North American session. This, along with developments surrounding the coronavirus saga, will drive the USD demand and provide some impetus to the AUD/USD pair. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities.

Technical levels to watch