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AUD/USD sticks to modest gains, upside seems limited amid geopolitical risks and bullish USD

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  • AUD/USD stages a modest recovery from a two-month low touched on Friday.
  • The uptick seems unaffected by the Iranian attack on Israel over the weekend.
  • Reduced Fed rate cut bets favor the USD bulls and should cap gains for the pair.

The AUSD/USD pair attracts some buyers on the first day of a new week and recovers a part of Friday's losses to the 0.6455 area, or its lowest level since February 14. Spot prices, meanwhile, react little to the latest geopolitical developments and trade around the 0.6470-0.6475 region during the Asian session, though any meaningful appreciating move still seems elusive. 

Iran launched explosive drones and missiles at Israel late on Saturday in retaliation for a suspected Israeli attack on its consulate in Syria earlier this month, raising the risk of a further escalation of conflicts in the Middle East. The markets, however, remain relatively calm, which is evident from a generally positive tone around the US equity futures and turns out to be a key factor lending some support to the risk-sensitive Australian Dollar (AUD). The US Dollar (USD), on the other hand, stands tall near its highest level since early November amid hawkish Federal Reserve (Fed) expectations and caps the upside for the AUD/USD pair. 

Data released from the US last week did little to ease concerns about still-sticky inflation and reinforced market expectations that the Fed will delay cutting interest rates this year. Adding to this, comments by a slew of influential FOMC members forced investors to push back their expectations for the first rate cut to September from June. The outlook keeps the US Treasury bond yields elevated near the YTD peak touched last week, which, along with persistent geopolitical tensions, should underpin the safe-haven Greenback. This, in turn, warrants some caution before confirming that the AUD/USD pair has bottomed out in the near term. 

Moving ahead, the market focus now shifts to the US economic docket – featuring the release of monthly Retail Sales figures and the Empire State Manufacturing Index. This, along with Fedspeak and geopolitical developments, will drive the USD demand and provide some impetus to the AUD/USD pair ahead of the Chinese macro data dump during the Asian session on Tuesday. Investors this week will also take cues from Fed Chair Jerome Powell's appearance and the release of Australian employment details on Thursday.

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