On Monday, the dollar continued to retreat on all fronts, but moderate optimism in the stock market suggests that the sell-off of the dollar is not caused by a quick recovery in risk demand, but by lowered expectations that US assets will best protect against stagflation risks. In light of the Fed's intransigent stance on inflation, which could eventually derail the recovery, US assets are less and less seen as an alternative that will provide a better risk-return ratio. This week, the focus of the market will be fresh PMI reports in the Eurozone and the UK, which will help clarify the risks of stagflation. Also, investors may demand a larger premium on Australian assets before release of elections results in the country. European markets and US index futures are moderately rising, currencies correlated with the demand for risk (AUD, NZD) show a significant increase against the dollar, USDCNY continues to slide down, which together suggests that a classic "relief rally" may take place this week:

The positive effect on the market was also provided by reports that President Biden is considering lifting some tariff restrictions against China.

This week there will be a number of interesting reports on the US economy that may either contain or increase fears that the US economy will not be able to weather a number of planned rate hikes by the Fed. Among them are household spending in April and Core PCE (a key indicator of inflation for the Fed). If consumer spending shows resilience despite high inflation, the market may view the dollar's rapid decline as excessive, allowing the US currency to regain some of its lost ground. Otherwise, the dollar will look for lower support levels, such as 1.07 on EURUSD and 1.2650 on GBPUSD.

The minutes of the last Fed meeting, which is scheduled for release on Wednesday, most likely will not contain anything new, since Powell and other Fed officials last week already approved two rate hikes of 50 bp at the next two meetings, and also declared that they were "committed" to the fight against inflation. This, by the way, means that only a deep market correction will be able to convince officials to soften the rhetoric, which, in general, greatly limits the possibility of a rally in risk assets.