Global Sentiment Improves But Caution Lingers

European markets flashed green on Tuesday, building on the previous session’s strong start to the final quarter of the year, as weakening US economic data raised hopes of a less aggressive stance by the Fed on rates. US futures are pointing to a higher open with the positive momentum from Europe potentially finding its way into Wall Street. Global equities could be offered further support if soft economic data fuels speculation around doves infiltrating central banks across the globe.

In the currency space, king dollar extended losses this morning as U.S Treasury yields dipped with the risk-on sentiment and softer US data. After clawing its way out of the abyss last week, sterling continues to recover, hitting a two-week high at 1.1430 this morning before paring back. A weaker dollar gave gold bugs the thumbs up to conquer $1700 while oil prices remain steady ahead of the OPEC + meeting on Wednesday.

In other news, Australia’s Reserve Bank surprised markets by raising interest rates by a smaller than expected 25 basis points this morning. Although the central bank had flagged in the past a possible slowdown in the pace of hikes, this surprise move sends an important message about the size of future hikes.

Despite the improving market sentiment, a sense of caution continues to linger in the air as investors brace for another busy week for global markets. The numerous speeches from Fed officials should keep market players well occupied ahead of the highly anticipated US jobs report on Friday. If hawks dominate the scene once again, this could fuel bets over more aggressive rate hikes by the Fed. Alternatively, any hint of more caution may stimulate speculation around the central bank adopting a softer stance on rates resulting in a weaker dollar.

All eyes on the US jobs report

Given how markets remain highly sensitive to anything relating to rate hikes, Friday’s non-farm payrolls report could set the tone for markets this month.

According to Bloomberg, consensus is expecting jobs growth to slow from 315k in August to 250k in September. The unemployment rate is projected to remain at 3.7% while wage growth is seen hitting 0.3%. If the jobs data exceeds market expectations, this boosts the chances around the Fed firing another monetary bazooka in the form of a 75-basis point hike. Alternatively, a disappointing report may reduce the odds of another super-sized move, ultimately weakening the dollar while supporting equity bulls.

Currency spotlight – GBPUSD

GBPUSD has staged an incredible rebound over the past few days, continuing its bounce from the all-time low of 1.0350. Sterling has drawn strength from the government’s U-turn to cut the top-rate tax for higher earners and a softer US dollar. While prices could edge higher in the short term, sterling is not out of the woods yet. Concerns over rising inflation, the gloomy economic outlook, and political noise are likely to haunt investor attraction towards the British pound. Looking at the GBPUSD through a technical lens, prices could sink back to 1.0850 if 1.1300 proves to be unreliable support. If bulls can stay in the driving seat, the next key level of interest can be found at 1.1600.

Commodity spotlight - Gold

Gold has kicked off the final quarter of 2022 on a positive note thanks to a softer dollar and subdued Treasury yields.

Market speculation around the Fed adopting a less aggressive approach on rate hikes has also sweetened appetite for zero-yielding gold. While prices may push higher over the next few days, the metal's outlook will be influenced by the US jobs report on Friday.

Looking at the technical picture, the breakout above $1700 may open the doors towards $1724 and $1760, respectively. Should prices dip back under $1700, the next key levels of support can be found at $1680 and $1655.

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