Sentiment Hit By Rekindled Fed Hike Bets

Asian shares were under attack on Tuesday, following the negative cues from Wall Street overnight as unexpectedly strong US data revived expectations of the Fed raising rates more than expected.

European futures are pointing to a mixed open this morning amid the shaky sentiment and lack of risk appetite. This overall market caution could trickle back down to US indices, empowering US equity bears ahead of a light week of data for financial markets. In the currency universe, the dollar pushed higher, dragging most G10 currencies lower while gold tumbled back below $1780. Oil bears seem to be in control as investors juggle the impact of the new EU sanctions, the OPEC+ meeting over the weekend, and the strong US economic data.

Overnight, the Reserve Bank of Australia (RBA) raised its key interest rate by 25 basis points as widely expected. Given how the central bank left the door open to further hikes down the road, this has offered some support to the Australian dollar. However, signs of easing inflationary pressures may raise hopes that prices have peaked. Back in October, inflation cooled to 6.9% compared to 7.3% year-on-year in September. With the central bank potentially adopting a less aggressive approach towards rates as the tightening cycle approaches an end, this could eventually hit the Australian dollar.

Dollar receives a lifeline?

Over the past few weeks, the dollar has been bruised and battered by expectations around the Federal Reserve adopting a less aggressive approach towards interest rate hikes. It has depreciated against every single G10 currency since the start of the fourth quarter as long dollar positioning eased and the DXY index shifted in favour of the bears. However, buying sentiment towards the world’s reserve currency received a slight boost yesterday after the ISM services PMI data surprised to the upside, further fuelling bets that the Fed could keep its foot on the rate rise pedal. While the central bank is widely expected to hike interest rates by 50bps next week, continued strength in the labour markets and signs of inflation regaining momentum could lead to a higher peak or “terminal” rate than anticipated.

Looking at the technicals, the DXY is trading below the 200-day SMA and 105.50 resistance level. A breakout above this point could encourage more upside towards 107.00 and 107.85, respectively.

Currency spotlight – USDCAD

USDCAD is edging higher ahead of the Bank of Canada’s final rate decision for 2022 on Wednesday, which analysts expect to conclude with a 25bp rate hike. However, money markets price in a 68% chance of a 50bp move after better-than-expected Q3 GDP and the tight labour market.

Looking at the technical picture, the USDCAD remains fairly neutral on the daily charts with support found at 1.3390 and resistance at 1.3620. A breakout could be on the horizon with the BoC meeting acting as the directional catalyst.

Commodity spotlight – Gold

Gold crumbled yesterday, cutting through key levels like a hot knife through butter thanks to a stronger dollar, renewed Fed hike bets, and the easing of China’s Covid zero policies.

The precious metal fell roughly 1.6% and has found itself back within the November range. Support can be found at $1735 and resistance at $1785. Given how bears seem to be in a position of power, prices could test the lower part of the range soon. Below this level, a decline toward $1700 could be on the cards.