Caution prevails as investors remain on edge

European stocks crept higher on Tuesday, rebounding after a rocky start to the trading week as investors remained jittery over rising interest rates and risks of a global recession. Oil bulls made a return this morning too, pushing the global commodity over 2% higher after collapsing to levels not seen since January 2022.

Overnight, Wall Street closed at the lowest level since December 2020, as a surging dollar and concerns over the UK’s new budget plan slammed equity bulls. In the currency space, sterling hijacked the spotlight after crashing to an all-time low of 1.0350 versus the greenback in the early hours of yesterday morning. Dollar bulls continued to dominate the scene, resulting in more pain for gold which tumbled to levels not seen since April 2020.

The past few days have certainly been wild for financial markets with fears around a global recession leaving investors on edge. Given how this week will be jampacked with speeches from numerous Fed officials, including Federal Reserve Chair Jerome Powell this afternoon, this could add to the overall tension, especially if Fed rate hike bets rise. Any fresh insights on the policy path or reiterating the hawkish stance may provide support to the greenback.

Pound to descend deeper into the abyss?

After sinking to an all-time low in the previous session, GBPUSD has staged an aggressive rebound almost clawing back the stomach-churning losses. Sterling has rallied more than 1% this morning, trading back above 1.08 thanks to profit-taking and dollar weakness. However, the currency is certainly not out of the woods yet as concerns remain elevated over the government’s huge tax-cutting “mini-budget” fueling inflation and debt. There has been a lot of chatter around the Bank of England launching an emergency rate hike to rescue the pound and calm markets. Even if the central bank was to intervene, the pound's upside could be capped by recession fears and other headwinds haunting attraction towards sterling.

Looking at the technical picture, this could be a critical week for GBP as the path of least resistance for the major certainly points south. Sustained weakness below 1.0850 could result in a decline back towards 1.0520 (the previous all-time low back in 1985) and 1.0350. Below this level is unchartered territories. Alternatively, a move back above 1.0850 may inspire bulls to challenge 1.1100 and 1.1350, respectively.

Oil gripped by recession fears

Oil prices rose more than 2% on Tuesday after rebounding from the lowest level since early January as a softer dollar buoyed the commodity.

Nevertheless, oil remains heavily pressured by global recession fears, ongoing demand-side concerns, and a broadly stronger dollar. While supply disruptions caused by the Russia-Ukraine war initially lifted prices, tighter monetary policy across the globe that could result in a prolonged economic downturn has capped oil’s upside gains. Given the recent weakness, markets are expecting OPEC+ to take action when they meet to set policy on October 5. At the last meeting, the group agreed to a symbolic reduction in supply of 100,000 barrels a day for October. Whatever decision the group makes next week may heavily influence oil’s outlook for the next few months.

Commodity spotlight - Gold

After sinking to its lowest level since April 2020 in the previous session, gold prices seem to be stabilising as the dollar rally pauses. Nevertheless, the precious metal remains under the mercy of a broadly stronger dollar and rising Treasury yields amid Fed rate hikes. Prices are trading around $1633 as of writing and could edge higher before bears resume their punishment. We may see high levels of volatility for gold over the next few days as the markets digest the flurry of speeches by numerous Fed officials.

Looking at the precious metal from a technical lens, the path of least resistance points south. Sustained weakness below $1660 resistance should keep bears in a position of power. The latest break under $1625 may signal a further decline towards $1600. If prices move back above $1660, the next level of interest may be found at $1680.