This morning's data from China indicates that the country's economic recovery is losing momentum, worsening the outlook for global growth and triggering a risk-off sentiment.

Market sentiment worsened in the Asian trading session on Wednesday (May 31st). The Purchasing Managers' Index (PMI) reports from China's manufacturing sector showed a sustained negative trend, triggering selling pressure on most major currencies and driving the recovery of the US dollar.

The US Dollar Index (DXY) has risen by approximately 0.5% to a daily high of 104.57 when writing this news in the early European session. Meanwhile, NZD/USD dropped by 0.75%, and AUD/USD fell by 0.60% to their lowest levels since November last year.

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The Australian dollar initially showed some strength due to the decrease in US default risk and increased chances of an interest rate hike by the Reserve Bank of Australia (RBA). The release of Australia's inflation data earlier in the morning indicated persistent upward price pressure, potentially warranting another interest rate increase. However, the subsequent publication of China's report immediately weighed down on the Aussie.

China's National Bureau of Statistics reported a decline in the Manufacturing PMI from 49.2 to 48.8 in May 2023, contrary to the consensus expectation of improvement to 51.4. The Non-Manufacturing PMI also dropped from 56.4 to 54.5 during the same period, falling short of the consensus estimate of 54.9. Both figures reflect a further loss of momentum in China's economic recovery.

"We have to remember that the Aussie is a growth currency, (and) very much linked to commodity prospects," said Rodrigo Catril, senior forex strategist at National Australia Bank. Catril noted that the lack of positive news from China exacerbates concerns about commodity price declines, surpassing speculations of tighter monetary policy.

"The recovery in China, or the lack of it, is an important theme for G10 currency markets," reported Reuters, " said Shusuke Yamada from Bank of America in Tokyo. "If everything else remains equal, a weak China is positive for the US dollar and, to some extent, positive for the yen compared to the euro or the Aussie."

Selling pressure on non-safe haven currencies continued in the early European session. The favored duo of EUR/USD declined by approximately 0.7% to 1.0660, while GBP/USD weakened by 0.5% to 1.2350.