After falling steadily throughout the first part of Friday’s European session, the AUD/USD currency pair rallied. In the previous hour, due to the selling of US dollars, spot prices reached a new daily high of 0.6765.

The dollar is under pressure as yields on US Treasury bonds have fallen slightly. Meanwhile, upbeat Chinese macro data boosted the Australian Dollar as investors bet on a strong rebound in the world’s second-largest economy, sending the Greenback tumbling. However, several factors may make bulls reluctant to place large bets on the AUD/USD pair, thereby capping further gains for the time being.

US bond rates and the dollar should rise if investors believe the Federal Reserve will keep its hawkish stance in response to persistently high inflation. Bets increased as hawkish FOMC members highlighted the need for further rate hikes to effectively tame inflation. As of Thursday, the yield on the benchmark 10-year US government bond had risen to its highest level since November, and the yield on the rate-sensitive 2-year Treasury note had risen to its highest level since July 2007.

The potential economic effects of rising borrowing costs are another source of concern for investors. The cautious mood on the equity markets could help limit losses in the greenback and cap the AUD/advances. USD’s Recent spot price weakness below the 200-day Simple Moving Average (SMA) supports bearish trades and indicates that spot prices are likely to continue their downward trend.

Trade Idea

The Reserve Bank of Australia (RBA) will be holding a meeting to discuss monetary policy next week, so traders may be hesitant to make risky wagers. Friday morning North American time is when investors will be focusing on the US ISM Services PMI report. Along with US bond yields and risk sentiment, this will boost demand for the US dollar, leading to opportunities in short-term AUD/USD trading.