AUD/USD OUTLOOK:

• AUD/USD rebounds following last week’s sell-off
• The rally in U.S. equities boosts appetite for riskier currencies
• Despite today's moves in FX markets, geopolitical tensions in the Middle East create a challenging backdrop for the Australian dollar

After a steep sell-off late last week, the Aussie rebounded against the U.S. dollar, boosted by optimistic sentiment, with the upswing in Wall Street's equity markets providing support to more risk-oriented currencies. Against this backdrop, AUD/USD advanced nearly 0.8% to 0.6343, coming within striking distance from overtaking overhead resistance in the 0.6350 area.

Despite today’s movements, the Australian dollar maintains a bearish bias, particularly when examined from a technical perspective. The sequence of lower highs and lower lows coupled with the pair’s position below critical moving averages and a key descending trendline that has guided the market lower since July, all contribute to reaffirming the earlier assessment of a negative outlook.

From a fundamental standpoint, the geopolitical climate in the Middle East stands out as a potential weak point for the Australian dollar. While there was no substantial escalation in the Israel-Hamas war over the weekend, the situation could change soon, with Prime Minister Benjamin Netanyahu expected to greenlight a ground invasion of the Gaza Strip in the upcoming days.

Any development that raises the geopolitical temperature in the Middle East is likely to exert downward pressure on high-beta currencies in the near term. This could lead to renewed losses for AUD/USD. Meanwhile, the U.S. dollar, known for its safe-haven appeal during periods of elevated uncertainty and increased volatility could command leadership in the FX space.

Focusing on technical analysis, AUD/USD rebounded from support around the 0.6300 handle on Monday, but failed to clear a key ceiling at 0.6350. It is imperative that traders keep a watchful eye on this area in the coming days, bearing in mind that a breakout could open the door to a move toward trendline resistance at 0.6425. On further strength, attention shifts to 0.6460, followed by 0.6510.

On the other hand, if sellers stage a comeback and incite a pullback from the pair's current position, the first defensive line against bearish forces can be found within the 0.6300/0.6285 range. AUD/USD may encounter support in this region during a market reversal, but in the case of a breakdown, the bearish pressure could pick up pace, setting the stage for a possible retest of last year’s lows 0.6170.

AUD/USD TECHNICAL CHART

AUD/USD Chart Created Using TradingView

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