The US Dollar recovered firmly on Tuesday, with the Greenback sprinting higher against the Japanese Yen. The turnaround was triggered during the US trading session on Monday when the President of the Federal Reserve Bank of Chicago, Austan Goolsbee, tried to soothe markets by stating that a few easing data points are not enough to open the debate on a recession. The President of the Reserve Bank of Australia, Michelle Bullock, supported this view and added that another rate hike is still a possibility, although the RBA decided to keep its interest rate unchanged during its August meeting earlier in the day.

On the economic front, the main focus for this week has already passed. The Institute for Supply Management (ISM) data, released on Monday, helped spark the turnaround in the Dollar’s appeal, as the ISM Service Purchasing Managers Index (PMI) expanded at a faster pace than expected. The main theme on Tuesday is the US Trade Balance data for June, though no significant market movements are expected from this. Equity markets are jumping higher, with the Japanese Nikkei and Topix closing Tuesday with 10% gains each. Europe is trading solidly in positive territory. In the US futures market, the Nasdaq leads the recovery, rising nearly 2% on the day. Recession fears may have eased for now, though markets are starting to fear that the Fed has overpromised on rate cuts and might underdeliver when the time comes to act. We shall see.

EUR/USD erased a good portion of its gains yesterday as the USD staged a bit of a comeback after a broad market selloff. Earlier in the day, data from Germany showed that Factory Orders rose by 3.9% on a monthly basis in June. This reading followed the 1.6% contraction recorded in May and exceeded the market expectation of a 0.8% increase. Nevertheless, this data failed to trigger a noticeable market reaction. At this point, it's difficult to say whether the USD will benefit from safe haven flows if geopolitical tensions re-escalate.

GBP/USD started the session on the back foot. Escalating geopolitical tensions triggered an intense flight to safety at the beginning of the week. The broad market selloff weighed heavily on the USD, but the risk-sensitive Pound Sterling failed to find demand in the risk-averse market environment. Although there are no fresh developments pointing to a de-escalation of the conflict in the Middle East, investors seem to be breathing a sigh of relief for now. Last week, the BoE cut interest rates by 25 basis points to 5%, with a 5-4 vote split, as expected. The BoE suggested that the central bank will use a cautious approach in its policy normalization process.

USD/CAD has come back to start the session as a general USD rally is the theme of Tuesday. That said, a turnaround in global risk sentiment, along with dovish Fed expectations, might hold back USD bulls from placing aggressive bets and cap gains for the currency pair. In fact, markets are currently pricing in a near 100% chance that the US central bank will cut interest rates by 50 basis points in September. Furthermore, the risk of a broader Middle East conflict continues to fuel concerns about supply disruptions from the key oil-producing region, which could help limit losses for Crude Oil prices.