It’s a new year but the same old story with markets sensitive to Fed rate hike bets and hawkish chatter by policymakers.

Asian shares were knocked lower during early trading as investors evaluated comments from two Federal Reserve officials overnight. A sense of caution ahead of the key US inflation report on Thursday dampened the overall mood, encouraging investors to adopt a guarded approach towards riskier assets.

European futures are pointing to a lower open this morning amid the shaky risk sentiment. In the currency markets, the dollar was little changed but remains pressured by market expectations of a less hawkish Fed, despite the recent comments from Raphael Bostic and Mary Daly. Gold continues to shine, kissing levels not seen since May 2022 above $1880 while oil remains a fierce battleground for bulls and bears.

In other news, the World Bank is expected to unveil its global economic prospects report today. The international financial institution has already expressed concerns about the global economic outlook, warning of recession risk in 2023. Should the forecasts point to a global economic slowdown, another wave of risk aversion could sweep across markets as investors rush to safety.

More pain ahead for the Dollar?

Over the past few weeks, it has been the same old story for the tired dollar.

Expectations around a less hawkish Fed and subdued Treasury yields have clipped the greenback’s wings. Things are looking rough for the buck which has depreciated against almost every single G10 currency since the start of 2023. Bears remain in the vicinity despite the recent hawkish comments from Fed officials overnight with further downside on the cards if Thursday’s US inflation cools again.

According to Bloomberg, annual headline inflation for December is expected to cool to 6.5% from the prior print of 7.1%. Should expectations become reality, this will mark the sixth straight monthly decline and the lowest since October 2021. More signs of falling inflation may fuel talk around the Federal Reserve steering to a smaller rate hike at the start of next month. Alternatively, a hotter-than-expected CPI report could revive aggressive rate hike bets as investors question how slowly inflation will fall. Such a development could see the dollar rebound.

Before the key US inflation data later in the week, all eyes will be on Fed Chair Jerome Powell as he speaks during an international symposium at the Riksbank in Stockholm later today. Should the Fed Chair provide any guidance on rate hikes, this could influence the dollar.

Looking at the technicals, the DXY could be in store for more pain as the death cross technical pattern strikes. With the 50-period simple moving average (SMA) crossing down below the 200-day SMA, this signals a major trend reversal to the downside.  Sustained weakness below 103.00 could encourage a decline towards 101.30.

Currency spotlight – GBPUSD

It has been a choppy affair for GBPUSD recently as prices have traded within a 200-pip range with support at 1.1900 and resistance at 1.2100. However, the recent breakout has shifted the scales of power in favour of the bulls, with further upside on the cards. Bank of England Governor Andrew Bailey will be under the spotlight this morning as he speaks at the event at the Riksbank. This could translate to pound volatility depending on his remarks. Nevertheless, pound bulls remain in some control above 1.2100 with the next key levels of interest found at 1.2230 and 1.2300.

Commodity spotlight – Gold

Gold has kicked off 2023 on a solid note, gaining 2.7% since the start of the New Year.

The precious metal continues to draw strength from a softer dollar, falling Treasury yields, and growing expectations of a less hawkish Federal Reserve. Given how last Friday’s mixed jobs report has fanned speculation around the Fed slowing its rate hikes, further upside could be on the cards. In the meantime, gold’s outlook is likely to be influenced by the upcoming US inflation report. A further cooling in prices in December and lower bond yields would be a welcome development for zero-yielding gold. Looking at the technical picture, bulls remain in a position of power with the next key level of interest found at $1900.