• A combination of factors failed to assist AUD/USD to capitalize on its modest uptick.
• Omicron fears acted as a headwind for the perceived riskier aussie amid stronger USD.
• The USD drew some support from the cautious mood and the Fed’s hawkish outlook.

The AUD/USD pair surrendered its modest intraday gains and dropped to a fresh daily low, around the 0.7225-20 region heading into the European session.

Despite reports that the Omicron variant might be less severe than previously feared, investors remain uncertain over the economic impact of the continuous rise in new cases. This, in turn, kept a lid on the recent optimistic move in the markets and acted as a headwind for the perceived riskier aussie. Apart from this, a goodish pickup in the US dollar demand attracted some selling near the 0.7240 region on Monday and contributed to the AUD/USD pair's modest downtick.

The cautious market mood extended some support to the safe-haven greenback amid the Fed's hawkish outlook. It is worth recalling that the so-called dot plot indicated that the Fed could hike interest rates at least three times next year to contain stubbornly high inflation. The expectations were reaffirmed by the US Personal Consumption Expenditures (PCE) Price Index, which accelerated to 5.7% YoY in November and marked the largest annual growth since 1982.

Meanwhile, the downside remains cushioned, at least for the time being, as investors seemed reluctant on the back of the year-end thin liquidity conditions. Moreover, there isn't any major market-moving economic data due for release on Monday, either from Australia or the US. This, in turn, warrants some caution for aggressive bearish traders and before confirming that the AUD/USD pair's strong recovery move from the key 0.700 psychological mark has run out of steam.

Technical levels to watch