I do not think the idea of moving the Australian Embassy from Tel Aviv to Jerusalem is a good one. The Middle East Peace Agreement is nowhere near, an amicable, or even grudgingly acceptable one at this point , that being so I fail to see why Australia should upset anyone for no real benefit. After all, a 70 km / 54 minutes distance / time difference is minor considering that one is potentially leaving an area with a lot of Embassies to an area with one . ( And a really good reason not to move is going from the beach to the hinterland ! )
Following the US on this issue is not a matter of "developing a backbone" but a matter of doing what is best in our broader national interest , and our broader national interest does not always coincide with what is the US' broader national interest.
From a Trade and foreign relations perspective , maintaining and developing trade and ties with Muslim nations ( estimated 1.8 billion population, 24 % global population , majority in 49 countries , Indonesia is world's largest Muslim nation by population. Additionally , India and Malaysia are the second and third largest Muslim countries in our region , and the Asia Pacific area has the largest concentration of Muslims globally, outnumbering the Middle East and Africa combined ) may not be overly important for the US , but it has a greater significance for Australia , and I fail to see why Australia should place US interests above our own.
This does not mean that we should not give support to US foreign policy agendas , especially when it is our own interest , but it does mean that we should recognise that some US policy agendas are not compatible with Australia's , and moving our Embassy from Tel Aviv to Jerusalem is one of them.