AUD/USD Maintains Modest Gains; an Upside Appears Confined in the Face of Geopolitical Risks and a Bullish USD

On the first day of a new week, the AUD/USD pair gains some purchasers and partially recovers from its losses on Friday, reaching a level of 0.6455, which is its lowest point since February 14. In contrast, spot prices exhibit minimal reaction to the most recent geopolitical developments and fluctuate within the range of 0.6470-0.6475 throughout the Asian session. However, a significant upward trend remains elusive.

In retaliation for what is believed to be an Israeli assault on its consulate in Syria earlier this month, Iran fired destructive drones and missiles at Israel late on Saturday. This escalated the risk of further hostilities in the Middle East. In contrast, the markets continue to exhibit a notable degree of tranquility, as indicated by the predominantly optimistic sentiment surrounding US equity futures. This proves to be a significant determinant bolstering the risk-averse Australian Dollar (AUD). In contrast, the US Dollar (USD) is poised at its greatest level since early November due to optimistic expectations regarding the Federal Reserve (Fed), which restricts the positive movement of the AUD/USD pair.

Concerns about persistently high inflation were not alleviated by data released from the United States last week, which also strengthened market expectations that the Federal Reserve will postpone interest rate cuts this year. In addition, remarks made by a multitude of influential FOMC members compelled investors to revise their September expectations for the initial rate cut from June. The outlook maintains yields on US Treasury bonds near the year-to-date high reached last week; this, coupled with ongoing geopolitical tensions, ought to support the safe-haven greenback. As a result, caution should be exercised prior to concluding that the AUD/USD pair has reached its near-term low.

Subsequently, the market's attention transitions to the economic agenda of the United States, which includes the monthly publication of Retail Sales figures and the Empire State Manufacturing Index. This, coupled with geopolitical developments and Fed rhetoric, will stimulate USD demand and offer some support to the AUD/USD pair prior to Tuesday's Asian session, when the Chinese macro data release is anticipated. This week, investors will also be influenced by the appearance of Fed Chair Jerome Powell and the Thursday release of Australian employment data.