Investors watch US retail sales after China's economy contracted sharply

The dollar's popularity returns as investors reassess the Fed's stance on rate hikes amid a cautious mood after China's growth data disappointed ahead of US retail sales data.

The Chinese economic growth data on Friday provided a clear manifestation of global policymakers' challenges. 

According to data released by the government, there was a 2.6% decline in the gross domestic product in the second quarter, compared to an expected 1.5% drop. Regarding this new contraction rate, the 5.5% growth forecast for this year is likely optimistic now because with COVID-19 lockdowns taking place across the second-largest economy, widespread restrictions and weak confidence remain prevalent in many parts of the country.

In the face of a weaker growth outlook from China, there is no doubt that the global economy will be hurt. However, the policymakers are in no mood to prevent it effectively. At least in some ways, with less pain for investors. We see central banks across the globe attempting to combat inflation which comes at the cost of economic slowdown. Canada, New Zealand, the Philippines, South Korea and Singapore have all seen steep hikes in their interest rates this week alone. 

The dollar is set for the third winning week

The dollar hovered below a nearly two-decade high in Asian trading on Friday, having slipped on Fed policymakers' comments on a less aggressive rate hike. Despite two US Federal Reserve officials downplaying the possibility of a 100 bps interest rate hike in July, it is undeniable that US interest rates are set to more than double in less than a year. 

While the dollar index pulled back on Friday, it is still on track for a third consecutive week of gains, up 1.58% from last Friday due to both the expectations of a more aggressive Fed and concerns over a looming recession that fuelled the demand for the currency as a safe haven. 

Events of today

Investors are expected to keep a close eye on June retail sales, import and export prices, June's industrial production report, and July's preliminary consumer sentiment report, which will be released later in the session. Wells Fargo & Company and Citigroup Inc are also expected to report earnings.