I am sitting quietly trying to see and hear sights and sounds. So I am "observing sights" but am I "observing sounds" or is there another word for "sound" perception?
Sound perception = to hear. That said, observe is not restricted to physically seeing.
"He observed the law and was a good citizen." is one example I can think of off the top of my head.
"The first Christians continued to observe the Jewish festivals." is another example I found online.
To answer your question, it is not incorrect to say "I am observing sights and sounds."
Observe has a diverse array of usages and meanings. In the future, check a dictionary or thesaurus and provide your research.