AUD/USD hits fresh YTD high on hopes of Israel-Iran de-escalation

• The Australian Dollar hits a fresh YTD high as the US Dollar (USD) extends its decline.
• AUD/USD breaks above 0.6500, as Fibonacci resistance firms at 0.6550.
• Chinese Retail Sales and a potential de-escalation in the Israel-Iran conflict support gains, but upside risks remain.

The Australian Dollar (AUD) strengthened against the US Dollar (USD) on Monday, buoyed by improved risk sentiment amid easing geopolitical tensions. 

Reports from The Wall Street Journal indicate that Iran is signaling openness to negotiations with the United States (US), prompting optimism about a potential de-escalation in the recent Israel-Iran tensions. 

Diplomatic efforts are gaining momentum as international stakeholders, including the United States, Saudi Arabia, and the United Nations, continue to urge restraint and dialogue to prevent further escalation.

Additionally, economic data from China released early in the Asian trading session provided mixed signals but overall helped stabilize market sentiment. 

While China's Industrial Production and Fixed Asset Investment figures for May fell short of expectations, posting annual declines, robust Retail Sales data mitigated concerns about broader economic weakness. 

Given that China is Australia's largest trading partner, shifts in Chinese economic activity have a direct impact on Australian economic prospects.

Further supporting the AUD/USD pair was notable weakness in the US Dollar following a disappointing Empire State Manufacturing Index report. 

The June reading came in at -16.0, markedly below market expectations of -5.5, and representing its weakest performance since March. 

The significant miss underscores mounting concerns about contraction within the US manufacturing sector and adds uncertainty to the outlook for US economic momentum, placing downward pressure on the USD.

AUD/USD technical analysis signals rising bullish momentum

The daily chart shows how price action has been fluctuating within a rising wedge pattern that started forming in mid-May. 

This pattern has been providing strong levels of support and resistance. Recently, after rising above 0.6500, AUD/USD has continued to gain, and prices are now testing the 38.2% Fibonacci retracement level, which is around 0.6550, from the move between September and January. 

The Relative Strength Index (RSI) is currently at 59 and trending upward, indicating an increase in bullish momentum, although it has not yet reached overbought conditions. 

AUD/USD daily chart

If the price fails to break higher, the wedge could lead to a downward resolution, targeting support at the starting point of the upper boundary of the wedge, which is currently at 0.6516. Below that is the 0.6500 psychological level, a break of which could trigger a deeper pullback to the 200-day Simple Moving Average (SMA) at 0.6433.

On the other hand, if there is a breakout above the wedge, it could pave the way for a move toward the 0.6600 psychological level and toward the 23.6% Fibonacci level at 0.6699.