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Title: AUD/USD sticks to modest recovery gains around 0.6930-35 area, lacks follow-through

August 3, 2022 03:10 AM ET

By: AnalysisWatch

The AUD/USD reverses an intraday drop to 0.6885, or a near two-week low, reached on Wednesday, and remains near the daily high during early European trade.The pair seems to have halted for now this week's pullback from the mid-0.7000s, or the highest level since June 17, reached on Monday.

The Australian dollar is receiving support from strong domestic data and a positive report on Chinese services sector activity. Australian retail sales posted their third consecutive quarterly increase, rising 1.4% in the April-June period to set a new record. Separately, China's Caixin services PMI continued to improve, rising to a 15-month high of 55.5 in July.

This, and the subdued price performance of the US dollar, helped the AUD/USD pair to buy at lower levels.

Signs of stability in the equity markets proved to be a key factor, providing headwinds for the safe-haven greenback and additional support for the risk-sensitive Australian dollar. Still, a meaningful recovery does not appear to be in sight, urging bulls to be cautious.

Several Federal Reserve officials expressed caution on Tuesday, suggesting that further rate hikes are likely in the near future. In addition, growing recession fears and increasing diplomatic tensions related to the Taiwan visit by U.S. House of Representatives Speaker Nancy Pelosi are likely to curb any optimism in the markets. This, in turn, could reignite USD demand and limit gains in the AUD/USD pair.

Therefore, it is advisable to wait for strong follow-through buying before positioning for further appreciation. Market participants are now looking ahead to the US ISM Services PMI, which is scheduled for release during the early North American session. Together with US bond yields and general risk sentiment, this should influence the USD and provide some lift to the AUD/USD pair.

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