US dollar soar as markets spooked by China lockdown fears

The US dollar stormed higher on Monday, with investors flocking to the safe-haven currency amid a prevailing risk-off mood.

Meanwhile, the pound is struggling to attract support this morning, with GBP/EUR flat at €1.1904 and GBP/USD muted at $1.2725. GBP/CAD is rangebound at C$1.6210, while GBP/AUD and GBP/NZD have dipped to AU$1.7710 and NZ$1.9220, respectively.

Looking ahead, will a strong rebound in US durable goods help to extend the US dollar’s rally later this afternoon?

What’s been happening?

The US dollar surged at the start of this week’s session, with demand for the safe-haven currency being underpinned by risk-off flows.

The deterioration in market sentiment came amidst growing fears over China’s Covid outbreak, with investors fearing Beijing could be placed into lockdown following a spike in new cases.

Markets fear China’s draconian Covid measures could undermine growth in the world’s second largest economy in addition to disrupting the global supply chain.

The uptick in the US dollar limited the upside potential of the euro on Monday, due to the strong negative correlation between the world’s most traded currency pairing.

As a result, the single currency was unable to capitalise on the relief which followed Emmanuel Macron’s victory in the French election or Germany’s stronger-than-expected IFO business climate index.

The pound, meanwhile, tumbled yesterday amid fresh UK political uncertainty, following reports a group of senior Conservatives are plotting to oust Boris Johnson.

Reinforcing this downside were fading expectations for the next Bank of England (BoE) interest rate hike.

What’s coming up?

In terms of data, the only release of note today will be the latest US durable goods orders.

Economists predict goods orders will have rebounded last month, potentially buoying the appeal of the US dollar later this afternoon.

In the meantime, currency movements are likely to be linked to market sentiment in the absence of any other high-impact data.

This could see the US dollar firm and the pound struggle if the risk-off mood continues to prevail.

For EUR investors the focus may return to the war in Ukraine, potentially leaving the euro on the back foot if concerns over Russia’s renewed offensive continue to mount.