AUD/USD climbs to two-week high as USD weakens amid positive risk tone

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AUD/USD climbs to two-week high as USD weakens amid positive risk tone

The AUD/USD pair has continued to climb for the second straight day, currently sitting at a nearly two-week high above 0.6700. Investors are feeling more optimistic about the global economy and the prospect of a trade deal between the US and China. Multi-billion-dollar lifelines for troubled banks in the US and Europe have helped ease fears about widespread contagion, boosting investor confidence and contributing to the positive risk tone in global markets. This, in turn, undermines the safe-haven US dollar and benefits the risk-sensitive Australian dollar.

Expectations that the Federal Reserve will adopt a less hawkish stance in response to worsening economic conditions are also contributing to the AUD/USD pair's upward momentum. The recent collapse of two mid-size US banks, Silicon Valley Bank and Signature Bank, has forced investors to scale back their bets for more aggressive interest rate hikes by the Fed. As a result, the markets are now pricing in a nearly 90% chance of a smaller 25 bps lift-off at the upcoming FOMC meeting on March 21-22. This has led to a modest downtick in US Treasury bond yields, dragging the USD lower and contributing to the strong bid tone surrounding the AUD/USD pair.

However, investors remain cautious about the possibility of a full-blown global banking crisis and looming recession risks, which could cap the upside for the AUD/USD pair. Additionally, the Reserve Bank of Australia's recent dovish shift, signalling that it might be nearing the end of its rate-hiking cycle, warrants some caution for aggressive bullish traders before positioning for any meaningful near-term appreciating move for the major.

Despite these concerns, the AUD/USD pair remains on track to end the week on a positive note and reverse a major part of last week's losses to its lowest level since November 2022. Market participants are now looking to the release of the Michigan US Consumer Sentiment Index for short-term opportunities later during the early North American session on Friday. However, the focus will remain on the outcome of the highly-anticipated FOMC policy meeting, scheduled to be announced next Wednesday, which could have a significant impact on the AUD/USD pair's future trajectory.

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