Despite a calmer risk environment and heightened expectations for a pause in the Fed’s tightening cycle, the US dollar plunged on Monday morning on European deals, nearing its first monthly loss in five months.
Earlier today, the dollar index, which measures the dollar against six other currencies, traded 0.2% lower at 101.51, continuing to retreat from a two-decade high set in May of 105.01.
Moreover, EUR/USD rose 0.2% to 1.0753, GBP/USD rose 0.2% to 1.2637, while risk-sensitive AUD/USD was up 0.3 % to 0.7184, and NZD/USD rose 0.2% to 0.6549. Both pairs near three-week highs.
The stock market and bond market will be closed on Monday for the Memorial Day holiday, but risk appetite has been boosted by positive news that China will ease its COVID-19 lockdown.
On Sunday, Shanghai announced the lifting of business restrictions starting June 1, while Beijing reopened some public transportation and shopping malls.
The US dollar fell by 0.7% against the Chinese yuan to 6.6507 due to the quarantine exit.
Tuesday and Wednesday, China will release its manufacturing and non-manufacturing PMI forecasts, which will be scrutinized for clues about the extent of the economic downturn caused by the COVID restrictions on the world’s second-largest economy.
Additionally, broader risk sentiment has eroded the dollar, raising expectations that the Fed may pause the cycle to prevent the economy from spiraling into recession after an aggressive hike over the next two months.
The coming week will feature several Fed policymakers speaking to investors, beginning on Monday with Fed Chair Christopher Waller. Still, there will also be plenty of US economic data to examine, culminating in the highly acclaimed monthly labor market report.
According to economists, Friday’s non-farm payrolls report for May will show that the job market remains resilient, with 320,000 new jobs expected to enter the economy and the unemployment rate falling to 3.5%.
The latest Eurozone inflation estimate will be released on Tuesday, and data on consumer inflation for Germany and Spain will be released later on Monday.
Further, the EU will hold a two-day summit later this month to discuss a possible ban on Russian oil supplies in response to Russia’s invasion of Ukraine.
Analysts believe a significant improvement in global risk and a wider interest rate gap in the near term is unlikely and therefore expect the (now less overbought) dollar to bottom soon. Therefore, a return in EUR/USD below 1.0700 is more likely than another rally within the next few days.
