The dollar declined in early European trading on Monday, nearing its first monthly drop in 5 months, as a calmer risk appetite and heightened expectations of a pause in the U.S. Federal Reserve’s tightening cycle took their toll.

At 02:55 am ET, the dollar index, which tracks its exchange rate against a basket of 6 other currencies, traded 0.2% lower to 101.510, steadily retreating from the 20-year high of 105.010 seen in May.

In addition, EUR/USD rose 0.2% to 1.0753, GBP/USD gained 0.2% to 1.2637, maintaining its significant gains from last week, while the risk-sensitive AUD/USD gained 0.3% to 0.7184 and NZD/USD jumped 0.2% to 0.6549. Both currencies are near their 3-week highs.

Market volatility is likely to be low on Monday as US equity and bond markets are closed due to the Memorial Day holiday, but risk appetite was boosted by positive news from China on easing COVID-19 measures.

Shanghai said on Sunday that restrictions on businesses will be lifted from June 1, while Beijing reauthorized some public transportation as well as some shopping malls

As a result, USD/CNY fell 0.7% to 6.6507; with the yuan exchange rate supported by the lifting of the quarantine.

China is set to release forward-looking manufacturing and non-manufacturing PMIs on Tuesday and Wednesday, and these will be examined for clues on the extent of the economic slowdown caused by COVID-19 restrictions in the world’s second-largest economy.

In addition, a broader risk-off attitude toward the dollar has raised expectations that the U.S. Federal Reserve, after a decisive rate hike over the next 2 months, may then pause the rate hike cycle to prevent the economy from slipping into recession.

Investors will get a chance to hear from several Fed officials in the coming week, starting with Fed Governor Christopher Waller a little later today, but there will also be plenty of economic data from the US to study during the week, culminating in the widely watched monthly jobs report.

Friday’s US non-farm payrolls data for May is expected to show that the labor market remains robust, with economists expecting the economy added 320,000 jobs in May and the unemployment rate likely to fall to 3.5%.

In Europe, consumer inflation data for Germany and Spain will be released a little later today and will be scrutinized ahead of the publication of the latest eurozone inflation estimate on Tuesday.

In addition, EU governments are set to begin a 2-day meeting a little later in the session to discuss a sixth package of sanctions against Russia, including a possible ban on Russian oil supplies.

“We believe that the combination of a significant improvement in global risks and a further widening of short-term rate differentials in favor of the dollar is unlikely and therefore expect the (now less overbought) dollar to find a bottom soon,” ING analysts said in a note.

“This means that a EUR/USD return below 1.0700 in the coming days looks more likely than another rally.”