Most Asian currencies traded within a narrow range on Monday, influenced by mixed signals from Chinese economic data and a softer dollar, as market speculation about a U.S. interest rate cut grew.

A significant downward revision of Japan’s first-quarter GDP added to the cautious sentiment, keeping the yen under pressure and in focus for potential government intervention.

Chinese Yuan Weakens Amid Mixed Economic Data

The Chinese yuan remained weak, with the USDCNY pair hovering around levels not seen since November. Mixed purchasing managers index (PMI) data contributed to the uncertain outlook. Government PMI figures released on Sunday indicated that China’s manufacturing sector contracted for the second consecutive month in June. Conversely, private PMI data showed the sector expanding at its fastest pace in three years.

These conflicting signals, along with ongoing trade tensions with the West and waning optimism over stimulus measures, continued to exert selling pressure on the yuan.

Broader Asian currencies, particularly those closely tied to China’s economy, showed limited movement. The Australian dollar (AUDUSD) was flat, while the Singapore dollar (USDSGD) and the South Korean won (USDKRW) saw slight gains. The Indian rupee (USDINR) maintained strength below the record highs reached in June.

Japanese Yen Remains Fragile After GDP Revision

The Japanese yen continued to weaken, with the USDJPY pair climbing to 161.19 yen on Monday, surpassing levels that previously triggered government intervention in May. An unexpected downward revision of Japan’s first-quarter GDP revealed a deeper contraction than initially estimated, casting a bleak outlook on the economy and raising doubts about the Bank of Japan’s capacity to tighten monetary policy.

Dovish signals from the Bank of Japan have been a significant factor in the yen’s decline throughout June.

Dollar Weakens Amid Rate Cut Speculation

The dollar index and dollar index futures both declined by more than 0.2% on Monday, extending losses from Friday. This followed the release of the PCE price index, which indicated a slight easing in inflation. The data bolstered expectations that the Federal Reserve might reduce rates by 25 basis points in September, according to the CME FedWatch tool.

This week, market participants are keenly awaiting further signals from the Federal Reserve. Chair Jerome Powell is scheduled to speak on Tuesday, and the minutes from the Fed’s June meeting will be released on Wednesday. Additionally, nonfarm payrolls data for June is expected on Friday, which will be critical in shaping the Fed’s policy direction.

Analysis:

The interplay between mixed economic data from China, a softer dollar, and Japan’s economic challenges presents a complex scenario for Asian currencies. The potential for a Federal Reserve rate cut in September provides a bullish backdrop for currencies against the dollar. However, the weak outlook for China and Japan could limit significant gains.

Investors should monitor upcoming U.S. economic data, particularly the nonfarm payrolls and any new insights from the Federal Reserve. Developments in China’s economic policies and potential government interventions in Japan will also be crucial in shaping currency movements.

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