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Volatile week ahead for financial markets?

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By Lukman Otunuga, Senior Research Analyst at FXTM

Stocks in Asia traded cautiously on Tuesday, following a negative close on Wall Street overnight as growth concerns, inflation worries and geopolitical tensions hit risk sentiment.

European markets opened lower Tuesday morning due to the deepening crisis in Ukraine, with the caution likely to find its way back to US markets in the afternoon.

In the currency space, the mighty dollar rose to a fresh two-year high during early trade, supported by rising treasury yields and Fed hike bets. Gold slipped after almost kissing $2000 in the previous session, while oil benchmarks steadied after jumping on Monday.

Despite Monday’s public holiday in most of Europe, this is shaping up to be another volatile and eventful week for markets.

The latest comments from the World Bank have added to the cocktail of caution that will most likely influence sentiment over the next few sessions. The bank cut its global growth forecast for 2022 by nearly a full percentage point to 3.2% from its previous estimate of 4.1%, thanks to the war in Ukraine, soaring inflation, and the lingering effects of Covid-19.

Later Tuesday, the International Monetary Fund (IMF) will release its updated global economic outlook with markets expecting a downgrade for growth this year. Such a development may hit investor confidence, sweetening appetite for safe-haven assets.

On the earnings front, Johnson & Johnson and insurance company, Travelers, will report their latest results before the opening bell. Streaming giant Netflix will release its earnings after the market close.

Traders will also focus on speeches from financial heavyweights Fed Chair Jerome Powell and ECB President Christine Lagarde later this week.

Dollar flexes muscles

The dollar tightened its grip on its throne Tuesday morning by rising to a fresh two-year high as investors braced for more aggressive U.S. rate hikes. Markets have fully priced in a 50bp rate hike at the Fed’s May meeting, with the odds of another half-point rate hike in June very high.

Given how the dollar has appreciated against every G10 currency this month, bulls are in a position of power to drive prices higher.

Considering how the week ahead will be filled with more speeches from Fed officials, this could fuel upside gains if they all sing a hawkish tune. Indeed, we heard from arch-hawk Bullard overnight who signaled an openness to a 75bp hike.

The dollar index (DXY) has the potential to challenge 103.00 if a solid daily close above 101.00 is secured.

Gold demand amid risk

After rallying within a hair’s length of $2000 in the previous session, gold is trading back around $1974 early Tuesday.

With numerous competing themes likely to influence market sentiment this week, gold may find itself pulled and tugged by conflicting forces. Heightened geopolitical risks and global growth concerns could trigger risk aversion, sending investors rushing towards gold’s safe embrace.

However, an appreciating dollar, rising Treasury yields, and Fed hike expectations may create multiple obstacles down the road.

On the technical side, gold has the potential to trend higher, but prices seem to be forming another range.

Support can be found at $1960 and resistance at $2000. A move below $1960 could trigger a selloff towards $1920. Alternatively, a solid breakout above $2000 may open the doors towards $2009, $2015, and $2050, respectively.

 

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