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Markets spooked by China lockdowns, rate hike jitters

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By Lukman Otunuga, Senior Research Analyst at FXTM

Asian markets were wrapped in caution Tuesday as investors nursed the nasty hangover from the previous day’s rout as fears over the impact of China’s new lockdowns lingered in the air.

Overnight, Wall Street was thrown a lifeline later after Twitter agreed to be bought by billionaire Elon Musk. In the currency space, the mighty dollar climbed to its highest level since March 2020 thanks to risk aversion and expectations over the Fed raising rates by 50 basis points next month.

There was no love for gold despite the risk-off mood, with the precious metal securing a daily close below $1900, while oil tumbled below $100 amid worries about the global energy demand outlook.

Caution is likely to remain the name of the game this week with sentiment fragile as strict lockdowns in China, concerns around a global slowdown, Fed rate hike fears and geopolitical risks leave investors on edge.

On the data front, there are a couple of key releases from major economies, especially in the United States. Tech titans will be publishing their earnings this week with Microsoft and Google parent Alphabet announcing their results on Tuesday after the market close.

With so much going on, this promises to be another eventful and potentially volatile week for financial markets. Monday’s wild movements across the FX, commodity and equity space are testament to this.

Dollar bulls charge on

The dollar kicked off the week by appreciating against almost every G10 currency as concerns over the economic impact of China’s strict lockdown sent investors rushing towards safety.

Market expectations over the Federal Reserve aggressively raising rates also empowered dollar bulls, propelling the DXY dollar index to a fresh two-year high.

There are several key economic data points over the next few days which are likely to inject the currency with renewed vigour.

US consumer confidence, Q1 GDP, and the PCE deflator will all be published, ahead of the key FOMC meeting next week. Should the data further reinforce market expectations over the Fed aggressively raising interest rates, the dollar could be set to appreciate further.

Oil back below $100

Oil benchmarks wobbled below $100 Tuesday morning after experiencing a sharp selloff in the previous session, due to fears that lockdowns in China will hit energy demand in the world’s second largest economy.

On top of this, an appreciating dollar is adding extra pressure on the commodity with Brent shedding roughly 1.5% this month. That said, geopolitical risks may limit downside losses, especially if the United States and its allies consider expanding sanctions on Russian oil imports.

On the data front, it may be wise to keep a close eye on the Energy Information Administration (EIA) report on Wednesday. Another weekly drawdown in crude inventories could lend oil bulls a helping hand.

Gold pressured below $1920

After trading within a range for many weeks, gold finally experienced a solid break below $1920 support with bears securing a daily close beneath the psychological $1900 level. The precious metal struggled to shine against a mighty dollar and aggressive Fed rate hike bets.

With the greenback on a tear and potentially receiving further support in the week ahead, this could spell more trouble for gold, despite the market caution and risk aversion.

Looking at the technical picture, sustained weakness below $1920 could signal a decline towards $1880 and $1850. Should $1900 prove to be reliable support, prices could retest $1920.

A move back above this level will send prices into the prior range with the first level of resistance at $1960.

 

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