Dollar Weakens; Heading for Monthly Drop on Rising Risk Sentiment By

By Peter Nurse

Investing.com – The U.S. dollar slipped lower in early European trade Monday, heading for its first monthly drop in five months as a calmer risk environment and raised expectations of a pause in the Federal Reserve’s tightening cycle weighed.

At 2:55 AM ET (0655 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.510, steadily retreating from the two-decade high of 105.010 seen earlier in May.

Additionally, rose 0.2% to 1.0753, rose 0.2% to 1.2637, holding on to last week’s hefty gains, while the risk-sensitive climbed 0.3% to 0.7184 and jumped 0.2% to 0.6549, both pairs near three-week highs.

Volatility is likely to be light Monday, with U.S. stock and bond markets closed for the Memorial Day holiday, but helping the risk appetite has been positive news out of China regarding the easing of COVID-19 measures.

Shanghai said on Sunday curbs on businesses will be removed from June 1, while Beijing reopened parts of its public transport as well as some malls.

fell 0.7% to 6.6507 as a result, with the yuan buoyed by the progress out of virus lockdowns.

China is set to release forward-looking and PMIs on Tuesday and Wednesday, and these will be studied for clues as to the extent of the economic slowdown the COVID restrictions have wrought on the world’s second largest economy.

Also boosting the wider risk sentiment, to the detriment of the greenback, have been the raised expectations that the Federal Reserve, once it has hiked aggressively over the next two months, might then pause its hiking cycle in order to prevent the economy tipping into recession.

Investors will get the chance to hear from several Fed policymakers in the coming week, starting with Fed Governor later Monday, but there is also a plethora of U.S. economic data to study during the week, culminating with the widely watched monthly employment report.

Friday’s data for May is expected to show that the labor market remains robust, with economists expecting the economy to have added 320,000 jobs in May, while the is expected to tick down to 3.5%.

In Europe, and consumer inflation data are due later Monday, and will be studied carefully ahead of Tuesday’s release of the latest flash estimate.

Additionally, the EU governments are set to start a two-day meeting later in the session to discuss a sixth package of sanctions against Russia as punishment for its invasion of Ukraine, including the potential banning of Russian oil.

“We think that the combination of a material improvement in the global risk environment and further USD-adverse widening of short-term rate differentials is unlikely, and therefore expect the (now less overbought) dollar to find a floor soon,” said analysts at ING, in a note.

“This means that a EUR/USD return below 1.0700 in the coming days looks more plausible than another rally.“