**FX Daily: Risk Assets Climb on Hopes of US-China Thaw**
*Original article by Francesco Pesole, adapted and expanded for clarity and depth.*
Global currency markets saw notable movement on the back of increasing optimism surrounding a potential de-escalation in tension between the United States and China. With markets broadly adopting a risk-on stance, investors are weighing the implications of geopolitical developments on exchange rates and central bank policies. The shift in sentiment has seen support for risk-sensitive assets, while traditional safe havens have come under some modest pressure.
This update explores the recent FX dynamics in detail, the evolving geopolitical situation, and what traders might watch out for in the coming days.
## US-China De-escalation Fuels Risk Appetite
Recent developments in the geopolitical landscape have raised hopes of a thaw in relations between Washington and Beijing. World leaders from both countries have shown signs of cooperation ahead of the upcoming APEC (Asia-Pacific Economic Cooperation) summit. Markets have interpreted these diplomatic signals as a positive indicator for global trade and economic stability.
– The improving tone of dialogue reduces fears of further trade restrictions or technological de-coupling.
– Equity markets across Asia responded positively, especially those in China-sensitive indices.
– Commodity-linked currencies and emerging markets benefited from the risk-on environment.
Investors are adjusting their portfolios, moving out of the US dollar and into higher-yielding or risk-aligned currencies like the Australian dollar (AUD) and New Zealand dollar (NZD).
## Dollar Weakens Amid Improved Sentiment
The US dollar has been losing ground as anticipation of a less hawkish Federal Reserve policy gains traction and risk sentiment improves globally. The greenback, which had strengthened significantly in 2023 due to safe-haven flows and strong US economic data, is now seeing a reversal in fortune.
– The DXY Dollar Index has softened, reflecting a rotation out of dollar-denominated assets.
– Lower Treasury yields are also contributing to the weaker USD trend.
– Expectations of easing inflation and softer economic data have diminished the possibility of further Fed rate hikes.
The medium-term outlook for the dollar hinges on how persistent risk-on sentiment remains. Should markets continue to gain confidence in global growth, the demand for the USD as a safe asset may erode further.
## Euro Holds Firm
The euro has been resilient in the face of US dollar weakness and shows no major signs of vulnerability despite a challenging regional economic backdrop.
– Eurozone data have continued to underwhelm, but FX investors are not positioning significantly lower on EUR for now.
– European Central Bank (ECB) officials have moved towards a more dovish tone, supporting the idea that rate hikes are done.
– Still, the unwinding of carry trades could support the euro in a risk-friendly environment.
EUR/USD is finding support around the 1.07–1.08 level, and further gains could materialize if dollar depreciation continues in tandem with reduced volatility in wider markets.
## Sterling Buoyed by Stable Domestic Backdrop
The British pound has found strength in alignment with general risk appetite, although the Bank of England continues to strike a more cautious tone regarding future rate hikes due to the UK’s persistently high inflation.
– Recent data has surprised marginally to the upside, particularly wage growth, which remains high.
– Despite falling inflation, the BoE is unlikely to rush into policy easing soon.
– GBP/USD remains sensitive to global market sentiment, maintaining gains around the 1.22–1.23 region.
Domestically, the UK’s economic picture remains sluggish, but not weak enough to trigger immediate recession fears. Consequently, sterling remains supported, particularly against low-yielding currencies.
## Commodity Currencies Rally
Currencies sensitive to commodity demand and global trade dynamics have seen renewed buying interest. Notably, the Australian and New Zealand dollars are leading gains, reflecting improvements in China-related sentiment.
– AUD and NZD benefit from strong ties to the Chinese economy, making them barometers of Asia-Pacific risk sentiment.
Read more on EUR/USD trading.