• AUD/USD gained some follow-through traction on Friday and shot to five-week tops.
  • A modest USD weakness, the risk-on mood benefitted the perceived riskier aussie.
  • Rebounding US bond yields helped limit the USD losses and capped gains for the pair.

The AUD/USD pair shot to fresh five-week tops during the early European session, albeit quickly retreated few pips thereafter.

The pair has been rallying since late September amid the widespread rally in commodity prices, which tend to benefit the resources-linked aussie. The momentum got an additional boost during the latter half of the current week in the wake of aggressive US dollar long-unwinding trade.

Despite a slightly stronger US CPI print, investors seem unconvinced about a sustained period of inflation. This was reinforced by a sharp decline in the longer-dated US Treasury bond yields, which triggered a USD corrective pullback from 13-month tops touched earlier this week.

Apart from this, the risk-on mood in the financial markets further undermined the safe-haven greenback through the first half of the trading action on Friday. This, in turn, benefitted the perceived riskier aussie and pushed the AUD/USD pair to the highest level since September 7.

However, a solid rebound in the US bond yields, along with prospects for an early policy tightening by the Fed helped limit any deeper USD pullback. The minutes of the September FOMC meeting reaffirmed that the Fed remains on track to begin tapering its bond purchases by the end of 2021.

Moreover, fears of a faster than expected rise in inflationary pressure forced investors to start pricing in the possibility of an interest rate hike in 2022. This seemed to be the only factor that held bulls from placing fresh bets around the AUD/USD pair and capped the upside.

Market participants now look forward to the US economic docket – highlighting the release of Retail Sales, Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index. This, along with the US bond yields and a scheduled speech by New York Fed President John Williams, will influence the USD and provide some impetus to the AUD/USD pair on the last trading day of the week.

Technical levels to watch