Dollar Retreats As China’s Rebound Sparks Risk-on Sentiment

The week of February 27 to March 3 saw the Dollar’s strength being challenged by the surprise rebound in China’s manufacturing sector.

The Dollar opened the week on a firm footing amidst the PCE-based inflation readings reinforcing the persistence of inflation as well as renewing fears of aggressive rate action by the Fed. The Dollar Index (DXY), a measure of the strength of the Dollar against a basket of 6 currencies increased from 105.21 on February 24 to touch a high of 105.36 on Monday.

The Dollar’s dominance was short-lived as data from China revealed a rebound in the manufacturing sector and revived hopes of a recovery in world economy.

National Bureau of Statistics of China showed a manufacturing PMI reading of 52.6 in February versus previous month’s reading of 50.1 and expectations of 50.5. The expansion in factory activity was the fastest pace since April 2012 amidst the recent decision by the Chinese govt to exit the zero-COVID policy. The Caixin China General Manufacturing PMI reading of 51.6 for February also came in above expectations of 50.2 and previous reading of 49.2.

Amidst the strong PMI data from China, the DXY dropped to as low as 104.09 on Wednesday before finally ending the week at 104.53. The DXY suffered a loss of 0.65 percent over the course of the week. DXY is currently at 104.47.

The EUR/USD pair increased 0.82 percent from 1.0546 on February 24 to 1.0632 on March 3. The pair’s highest point was 1.0692, touched on Wednesday and the lowest level was 1.0532, on Monday. The Euro’s rally against the Dollar came amidst data showing inflation in the Euro Area falling only to 8.5 percent, from 8.6 percent in the previous month. Markets were expecting a reading of 8.2 percent. The EUR/USD pair is currently at 1.0660.

The GBP/USD pair also increased 0.80 percent during the week, from 1.1944 on February 24 to 1.2040 on March 3. The pair ranged between the low of 1.1922 touched on Monday and the high of 1.2145 touched on Tuesday. The sterling’s performance came amidst the U.K.’s post-Brexit deal with the European Union and dovish comments from Bank of England Governor Andrew Bailey. The GBP/USD pair is currently at 1.2002.

The USD/JPY pair decreased 0.44 percent during the week from 136.46 on February 24 to 135.86 on March 3. The pair touched a high of 136.95 on Tuesday and the low of 135.26 on Wednesday. A more-than-expected jump in retail sales, a larger-than-expected slump in industrial production, and a consumer confidence reading on expected lines supported the yen’s movements over the course of the week. The USD/JPY pair is currently at 135.87.

The AUD/USD pair strengthened 0.64 percent in the past week from 0.6725 on February 24 to 0.6738 by March 24. The week’s trading ranged between a high of 0.6785 and a low of 0.6694. Data released during the week had shown the Australian economy adding 0.5 percent in the fourth quarter versus expectations of 0.8 percent growth. The AUD/USD pair is currently at 0.6732.

Key events on the horizon are the review of interest rates by the Reserve Bank of Australia and Bank of Japan as well as the Congressional testimony by Fed Chair Jerome Powell. In data releases, JOLTS data on job openings, the addition to non-farm payrolls as well as the rate of unemployment could reveal the strength of the job market and the headroom available for the Fed to raise rates further.

Forex News