Asian shares traded mostly lower on Tuesday along with US and European futures as investors adopted a cautious approach ahead of the reopening of the US markets after the President’s Day holiday.

Mounting diplomatic tensions between the United States and China, coupled with the prospects of the Fed maintaining its hawkish path have left market players on edge. This sense of unease and growing uncertainty may drag equity markets lower this week. In the currency space, dollar bulls were offered some support as Treasury yields climbed. Gold struggled for direction while oil prices slipped as expectations of more Fed rate hikes clashed with optimism over Chinese demand.

In other news, the minutes from the recent Reserve Bank of Australia meeting struck a hawkish tone with the central bank considering raising interest rates by 50bps. The bank eventually proceeded with a 25bp hike with policymakers agreeing that more interest rate increases were needed down the road to tame price pressures. Given how headline inflation jumped to 7.8% in the final quarter of 2022 from 7.3% in Q3, RBA hawks will remain in a position of power. Looking at the technical picture, AUDUSD remains trapped within a messy range on the daily charts. While a breakout could be on the horizon, a fundamental spark might be needed to get the gears turning.

Will the Fed Minutes Boost USD?

Market expectations around the Fed maintaining its hawkish bias have been boosted by robust US economic data since the start of February coupled with a sticky inflation report. This development has injected dollar bulls with renewed confidence, leaving G10 currencies sore and vulnerable. Despite the dollar's recent rebound, bulls could be rallying on shaky foundations. Markets expect the Fed to raise interest rates by 25bps in March with the Fed funds rate expected to peak around 5.3% by the summer. Given how the current inflation rate of 6.4% is the lowest since October 2021, further signs of cooling inflation may temper further rate hike bets.

All eyes will be on the FOMC meeting minutes on Wednesday which will be closely scrutinised for clues about the rate hike path. The key question is whether a 50bp rate hike could have been a possibility during its first meeting in 2023. Ultimately, the overall tone of the minutes and any fresh clues regarding rate hike timelines will most likely impact the dollar.

Currency spotlight – EURUSD

Over the past two weeks, it’s been the same old story with the EURUSD as prices remained trapped within a 150-pip range. While the euro has drawn support from ECB hike expectations and improving confidence towards the Eurozone economy, the dollar remains strengthened by speculation of more Fed rate hikes. This growing tension between the two currencies could result in a strong breakout in the major, with a fundamental spark needed to get things moving. It may be wise to keep an eye on the Eurozone February ZEW survey and PMIs out of Europe and the United States today.

Talking technicals, a strong daily close below 1.0650 in EURUSD could signal a decline towards 1.0500. Should 1.0650 prove to be reliable support, prices may retest 1.0800.

Commodity spotlight - Gold

Could we be experiencing the calm before the gold storm this week? The precious metal struggled for direction during early trade, lingering below $1840 as investors waited on the sidelines ahead of the Fed meeting minutes on Wednesday.

It has been a rough month for gold so far thanks to the strong jobs and hot inflation data from the United States pushing up Treasury yields. Hawkish comments from Fed officials rubbed salt into the wound with gold currently down 4.7% month-to-date. Given how the precious metal is enroute to experiencing its first monthly loss since October 2022, bulls need to get their mojo back. But a hawkish set of Fed minutes will most likely add insult to injury, potentially dragging prices toward $1800. Such a development may invite further downside in the short to medium term.