Risk sentiment wavers on Fed fears

Asian shares were a mixed bag on Tuesday as fears over rising U.S. interest rates hit overall sentiment in the region. European futures are pointing to a positive open this morning, tracking the modest gains on Wall Street overnight. However, a sense of caution continues to linger across financial markets as concerns over further interest rate hikes cap risk appetite. In the FX space, the dollar stabilised during earlier trade appreciating against every single G10 currency. Gold remains shaky, vulnerable, and heading for its worst month since mid-2021 thanks to a hawkish Fed. After sliding roughly 1% in the previous session, oil prices have inched up today amid hopes of a strong economic rebound in China brightening the demand outlook.

Overnight, Australian retail sales rebounded in January, growing 1.9% which beat market expectations of a 1.5% rise. The data suggests that households are still spending despite rising interest rates and soaring inflation. Such a development could place more pressure on the RBA to remain hawkish, fuelling fears around the growth outlook. It is worth keeping in mind that concerns remain elevated over strong price pressures and slowing economic growth in the face of rising interest rates. The aussie has weakened against every G10 currency this month, shedding over 5% against the dollar. Prices in AUDUSD are under pressure with a breakdown below 0.6700 opening the doors to lower levels.

Dollar dominates in February

It has been a positive month for the dollar, halting a run of four straight months of declines.

Incredibly positive jobs data, sticky inflation figures, and hawkish comments from Fed officials have injected the dollar with renewed confidence. As market expectations intensified over US rates remaining higher for longer, this boosted buying sentiment towards the dollar. The peak, terminal rate for Fed funds is now near 5.40%, up from around 4.90% in January. The key question is whether the positive momentum will roll over into the new month when we get fresh rate decisions from all the major central banks, including the FOMC meeting on March 22. Given how the dollar remains highly data dependent, there could be more volatility in the coming weeks.

Looking at the technical picture, the Dollar Index (DXY) remains bullish on the daily charts as there have been a series of higher highs and higher lows, giving us a bullish price channel. Should 104.30 prove to be reliable support, prices could test the next key level of interest at 105.50.

Commodity spotlight - Gold

It has been a rough month for gold with the precious metal losing over 6% of its value, as at the time of writing. This would be its worst month since mid-2021.

Gold has stood little chance against an appreciating dollar and rising Treasury yields as expectations have intensified over the Fed keeping rates higher for longer. With Fed hawks currently in a position of power, this could signal further downside for gold in the short to medium term.

Looking at the precious metal from a technical view, the bearish engulfing candlestick pattern on the monthly timeframe could signal a decline below $1800. It is worth keeping in mind that the 200-day Simple Moving Average can be found just below this psychological support level at $1776.