Markets whacked by hawkish Fed worries

Asian shares were painted red on Tuesday, tracking a heavy sell-off on Wall Street overnight as concerns over upcoming aggressive Fed hikes sapped risk sentiment. European shares took a beating in the previous session amid fears around the region’s energy crisis. Stocks are expected to open lower again this morning thanks to the negative sentiment and recession fears.

In the currency space, king dollar flexed its safe-haven muscles while EURUSD cut through parity like a hot knife through butter, touching levels not seen since 2002. Oil bulls regained hope overnight thanks to comments from Saudi Arabia regarding potential production cuts. And despite the risk-off mood, gold was hammered by a stronger dollar and rising Treasury yields.

There is a strong sense of unease across financial markets as investors grapple with inflation concerns, jitters over tightening US monetary policy, and recession fears. This will be a big week for markets thanks to the annual Jackson Hole Economic Symposium where central bankers and financial heavyweights congregate to discuss major economic issues. Investors hope to use this major event to gain fresh insight into the Fed’s thoughts on inflation, economic growth, and monetary policy. All eyes will be on Federal Reserve Chair Jerome Powell’s speech on Friday which is the main risk event and potential market shaker. What Powell reveals during the speech or chooses to hold back could set the tone for global markets in the weeks ahead.

On the data front, investors will be keeping an eye on the August S&P global flash PMIs for the eurozone due to be published this morning. Further declines are forecast as the energy crisis takes its toll on demand in manufacturing and services.

Will Fed’s Powell support dollar bulls?

The dollar continues to draw ample strength from risk aversion and fears over the Fed reasserting its hawkish message this week. Investors are looking for fresh clarity over how big future rate hikes will be and the strength of the US economy in the face of high inflation. If Powell fortifies expectations around the Fed moving ahead with another jumbo rate hike in September and more tightening ahead, this could boost the dollar. Alternatively, a cautious-sounding Powell that expresses concerns over the US economic outlook may reduce the odds of big rate moves, weakening the dollar.

Currency spotlight – EURUSD

After sinking back below parity, how much lower can the EURUSD trade? An appreciating dollar made easy work of the 1.000 level yesterday as prices tumbled to levels not seen since late 2002. The downside momentum is potent with the first level of interest at 0.9900.

A solid breakdown and daily close under this point could open the doors towards 0.9650 which acted as strong support back in the autumn of 2002. Should 0.9900 prove to be reliable support, prices could experience a bounce back to parity before resuming the downtrend.

Commodity spotlight – Gold

It has not been a great start to the week for gold. The precious metal was smothered by a stronger dollar, rising Treasury yields, and Fed rate hike jitters.

Prices are trading at $1736 as of writing with the next key level of support found at $1724. The potential for volatility in the precious metal is high this week, thanks to Jackson Hole and Powell’s remarks potentially acting as a fresh fundamental spark for gold. If prices are able to breach $1724, a selloff towards $1700 is on the cards. Alternatively, a move back above $1752 may open a path back towards $1770 and $1800, respectively.