Concern over slowdown in global economic recovery calms down

Investors’ focus turned to U.S. inflation and when the Fed will start tightening its monetary policy ahead of the release of the U.S. CPI for June

The dollar rose on Monday morning in Asia. Risk currencies remained above their recent lows against the U.S. currency as well as the yen as investor fears of a slowdown in the global economic recovery from Covid-19 calmed down for now.

The U.S. Dollar Index added 0.03% to 92.148 by 3:56 AM GMT.

The USD/JPY pair rose 0.01% to 110.16. According to data released earlier in the day, Japan’s core machinery orders grew a better-than-expected 7.8% month-on-month and 12.2% year-on-year in May. The data also said the country’s producer price index (PPI) grew 5% year-on-year and 0.6% month-on-month in June.

The AUD/USD pair inched down 0.12% to 0.7476. In New Zealand, the NZD/USD pair dropped 0.23% to 0.6979. New Zealand’s electronic card retail sales grew 4% year-on-year and 0.9% month-on-month, both lower than their previous figures.

The USD/CNY pair edged down 0.07% to 6.4741, with Chinese trade data due to be released later in the week.

The GBP/USD pair inched up 0.03% to 1.3904.

Investors’ focus turned to U.S. inflation and when the country’s Federal Reserve will start tightening its monetary policy ahead of the release of the U.S. core consumer price index (CPI) for June on Tuesday. Fed Chairman Jerome Powell will also testify before the Senate Banking Committee later in the week.

If we see strong data, the Fed could bring forward their projection for their first rate hike further from their current forecast of 2023. That would also mean they have to finish tapering earlier, Barclays senior FX strategist Shinichiro Kadota told Reuters.

A recovery in risk sentiment hampered the safe-haven yen ahead of the release of the U.S. CPI as well as the PPI. Should the data indicate inflation is more persistent than previously thought, the Fed could begin asset tapering sooner than expected and boost the greenback.

However, more benign data would benefit riskier currencies as asset tapering would begin later than expected in this scenario. Risk currencies slipped earlier in the previous week as disappointing economic data from several countries led to decreased investor bets.

The latest outbreaks of Covid-19 led to renewed restrictive measures in countries including Australia and South Korea and added to an already cautious mood.

However, the selloff had subsided by Friday, and investor sentiment further improved after the People’s Bank of China cut banks' reserve requirement ratio across the board to bolster China’s economic recovery from Covid-19.