AUD/USD rises slightly after touching a 0.6840 low, though gains are capped by prevailing risk-off sentiment

AUD Attempts Recovery Amid Geopolitical Tensions

The Australian Dollar (AUD) is making efforts to recover some ground against the US Dollar (USD) at the start of the week. After rebounding from a two-month low near 0.6840, the currency pair is finding it difficult to surpass the 0.6870 level, as persistent risk aversion continues to limit any substantial gains for the Aussie.

Market sentiment remains cautious on Monday, largely due to escalating conflict in the Middle East. The situation has become even more complex following the involvement of Iran-backed Houthi forces in Yemen over the weekend. Their recent missile attacks on Israel and threats to block the Bab el Mandab Strait—a critical route for Saudi oil exports—have heightened concerns about further increases in crude oil prices and a prolonged crisis.

Uncertainty Surrounds US-Iran Dialogue

US President Donald Trump has stated that both direct and indirect communications are ongoing with Iranian officials, commending what he described as their "very reasonable" approach. Additionally, Pakistan has offered to mediate discussions between the US and Iran.

Despite these diplomatic gestures, investors remain unconvinced, as skepticism persists in Tehran. Iran’s Parliament Speaker, Mohammed Baqer Qalibat, accused the US of sending mixed signals—talking about negotiations while allegedly preparing for a ground offensive. Other Iranian authorities have warned of severe consequences should such military action occur.

Given these developments, any upward movement in the risk-sensitive Australian Dollar is likely to encounter resistance. Analysts at UOB maintain a bearish outlook for the AUD/USD pair, identifying 0.6765 as a possible downside target. They note, "Although the weekly MACD remains positive, it has been steadily declining in recent weeks. The technical setup indicates that AUD/USD may continue to weaken. A decisive drop below the 0.6850/0.6870 support area could open the door to a sharper fall toward 0.6765."