Following a mixed close on Wall Street overnight, Asian markets opened sluggishly, with Japanese stocks starting the day on a negative note. However, optimism began to build as Chinese stocks rebounded sharply, marking their biggest rally in over two months. This shift in sentiment has left investors watching closely for the outcome of a highly anticipated press conference this Tuesday, hosted by the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE). Many are hoping to hear if Beijing will take additional steps to support the economy and defend its currency.

The risk recovery in global markets has contributed to a fresh downturn in the US Dollar (USD), particularly in early European trading hours. The Greenback lost some ground late Monday, following a report from Bloomberg, which cited sources familiar with the matter. The report indicated that advisors to US President-elect Donald Trump’s economic team are considering a gradual implementation of tariffs, with plans to raise them by 2% to 5% each month. This news helped fuel the USD’s decline as investors reassessed their positions.

Profit-taking on USD long positions has also contributed to the pullback, especially as markets brace for key economic data later this week. Traders are closely watching the US Producer Price Index (PPI) inflation data, along with speeches from Federal Reserve policymakers John Williams and Jeffery Schmid, for further guidance on the central bank’s interest rate path. According to the CME Group’s FedWatch Tool, traders are currently pricing in a 29 basis point (bps) easing this year, significantly lower than the 50 bps of easing the Fed projected in December.

Adding to the pressure on the US Dollar is the correction in the benchmark US 10-year Treasury bond yield, which has pulled back from its highest levels since November 2023. This retreat has further supported the downside momentum in the Greenback.

Currency Movements: The US Dollar Faces Broad Weakness

In the foreign exchange market, the USD is on the back foot across several pairs. The USD/JPY is hovering around 157.50, having experienced sharp movements in Asia following comments from Bank of Japan (BoJ) Deputy Governor Ryozo Himino. Himino mentioned that the BoJ would consider raising rates next week, with sustained wage gains increasing the likelihood of tightening policy.

Meanwhile, AUD/USD is holding onto its recovery gains, trading near 0.6200, as the risk rally in Chinese stocks fueled by stimulus hopes provides some support. However, the upside for the Australian Dollar remains limited due to the diverging policy outlooks between the Federal Reserve and the Reserve Bank of Australia (RBA), as well as ongoing US-China trade tensions.

EUR/USD is also seeing a firm recovery, trading above 1.0250, as it bounces back from the 26-month lows of 1.0773 hit on Monday. The broad pullback in the US Dollar and retreating US Treasury bond yields have provided support for the euro, even amid recent dovish comments from the European Central Bank (ECB). This sets the stage for potential further gains if the risk-on sentiment continues to build.

The Pound Sterling is seeing some relief as GBP/USD climbs above the 1.2200 mark, recovering from a 15-month low of 1.2100 set on Monday. The British currency has faced pressure from concerns over the UK’s fiscal health and rising inflation under the looming Trump 2.0 administration.

In the commodity-linked currencies, USD/CAD is seeing a modest rebound, though it remains below 1.4400. Oil prices have retreated slightly from their recent three-month highs, with WTI crude down 0.50% on the day, trading near $77.

Gold’s Potential to Surge Higher

Gold, on the other hand, is making another attempt to push towards the $2,700 mark, looking to resume its upward trajectory. The precious metal is benefitting from the broader risk-on sentiment and a technical breakout from a symmetrical triangle pattern on the daily chart. As markets digest economic data and central bank signals, gold could be well-positioned for further gains in the coming sessions.

As markets await fresh cues from economic data and central bank policymakers, risk sentiment is gradually improving, fueled by optimism surrounding Chinese economic support and a weaker US Dollar. The upcoming US inflation data and Fed speeches could provide the next major catalysts for currency and commodity markets, but for now, the focus remains on the potential for further USD weakness and continued recovery in risk assets.