Fed fears, China’s covid news take a toll on market sentiment, oil plummets

Risk aversion intensifies during early Monday as Friday’s US inflation data bolstered hawkish Fed bets. Adding to the sour sentiment were headlines from China, mainly relating to covid and Taiwan.

The risk-off mood allowed the US dollar and the US Treasury yields to refresh monthly tops while exerting downside pressure on the yen. 

Crude oil dropped the most, followed by precious metals, which in turn propelled USDCAD prices while weighing on the AUDUSD and NZDUSD. 

Cryptocurrencies also failed to ignore the pessimism as BTCUSD and ETHUSD refreshed multi-day lows.

• Brent oil declines for the third consecutive day, down 1.5% near $120 at the latest.
• Gold reverses Friday’s recovery by posting 0.80% losses to around $1,857 by the press time.
• USD Index dribbles around monthly top near 104.50, printing four-day uptrend.
• FTSE 100 and DAX are down around 1.3%  and 1.6% while EUROSTOXX50 plummets more than 2.0%.
• Wall Street benchmarks slumped more than 2.5% each on Friday.
• BTCUSD and ETHUSD refresh multi-day low as bears attack $25,000 and $1,300 at the latest.b

It’s all about the hawkish Fed

US CPI not only managed to bolster the Fed rate hike calls but also inflated chances that the central bank may announce a 75 basis point increase in the benchmark rate during Wednesday’s FOMC, versus the widely anticipated 50 bp of a lift. Hence, fears of the Fed’s aggression will challenge the global economic recovery grew stronger and weighed on the market’s mood.

Also, the return of the virus-led lockdown measures in China, after a brief unlocks, joined the Sino-American tensions over Taiwan to fuel the rush to risk safety.

With this, the US Dollar Index (DXY) and the US Treasury bond yields refreshed monthly top during the early day before retreating a bit. Further portraying the risk-aversion were the Asia-Pacific equities and Antipodeans.

It should be noted that the strong USD and economic fears took a toll on the oil prices and drowned the cryptocurrencies even as a holiday in Australia tried to tame the bears.

BTCUSD dropped to the lowest levels since late 2020 while ETHUSD bears poke early 2021 bottoms by the press time.

⏫ 🟢 Strong buy: USDCAD, USDTRY and USDCNY

⏬ 🔴 Strong sell: Nasdaq, silver, ETHUSD, Brent oil

⬆️ 🟢 Buy: USD Index, USDJPY

⬇️ 🔴 Sell: DAX, FTSE 100, gold, BTCUSD

Everything before Fed is transitory

Although multiple top-tier data are likely to entertain market players, mainly from the UK, nothing matters more than the Fed’s battle with inflation. It’s worth noting that the Brexit woes and political turmoil in Britain exert additional downside pressure on the GBPUSD. Also keeping the cable pressured are the latest downbeat UK data and a lack of trust in the Bank of England’s (BOE) capacity to tame the price pressure without hurting the economic growth.

The risk-aversion wave can keep the USD dollar and bond yields on the front foot, which in turn may weigh on the prices of commodities and Antipodeans.

It should be observed that the markets have high hopes from the Fed but Powell is less known for a bold move and hence a disappointment can’t be ruled out, which in turn requires traders to remain cautious ahead of the FOMC.

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