European markets are expected to open lower amid aggressive tightening expectations

On Tuesday, The dollar gained for a second day, reaching a new two-decade high against the yen, as concerns about inflation lifted Treasury yields and hurt equity markets.

Australian central bank raised interest rates on Tuesday by the most in 22 years. It warned of more tightening as it battles to contain surging inflation. The move stunned markets and sent the Australian dollar soaring. The Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 0.85% at the end of its June policy meeting, shocking investors who had wagered on a move of 25 or 40 basis points.

Stock markets in Europe are expected to open lower on Tuesday amid concerns about monetary policy tightening to combat inflation, while the United Kingdom faces political uncertainty.

Sterling weakens due to UK political turmoil

Tuesday will also be a critical day for the UK market following Prime Minister Boris Johnson's defeat in a vote of no-confidence from his own lawmakers. Johnson now faces the difficult task of restoring the confidence of his own party and country. Johnson won the vote 211 to 148, a significantly lower number than when lawmakers tried to unseat his predecessor Theresa May, who won her vote but resigned six months later.

Aggressive tightening weighs on equities

A meeting of the European Central Bank is scheduled for Thursday, and rate hikes are expected to begin in the third quarter. However, there is growing concern that policymakers could opt to signal a more aggressive tightening path than that outlined by ECB President Christine Lagarde a couple of weeks ago, significantly after Eurozone CPI rose to a record 8.1% in May.

According to Lagarde, the central bank should start raising the deposit rate, which is currently -0.5%, in July and should reach zero or "slightly above" it by the end of September before increasing further "towards the neutral rate."

Gold is under the pressure of a strong dollar

Concern over the Fed's aggressive monetary policy rekindled recessionary fears and revived the demand for the US dollar as a safe haven, ending the rebound in XAUUSD. US yields rebounded firmly in American trading, with the benchmark 10-year rate surpassing the crucial 3% threshold. Once again, the bright metal dropped below $1,850 due to renewed selling pressure. XAU bulls did not receive any relief from Wall Street stocks' declines driven by higher yields. However, the weaker equity in the European market and instabilities in the UK can bring more attention to gold during the EU trading session on Tuesday.

There will be some volatility as full markets resume, which could exacerbate the metal's downside. The buck may continue to benefit from the renewed upsurge in the USD/JPY pair as the yen sets a fresh 10-year low.

Events of today

We will examine UK PMI data later in the session. Investors also await US crude supply data from the American Petroleum Institute, due later in the day. This data is expected to fall as the US driving season kicks into top gear.