Investing.com – The U.S. dollar fell in early European trading on Friday but was still on track for its biggest weekly gain in more than a month, thanks to fading expectations of early rate cuts by the Federal Reserve.
At 04:40 ET (08:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading 0.1% lower at 104.910 but was on track for a gain of 0. 6%, the largest one-week increase since mid-April.
Dollar boosted by lower expectations for rate cuts
Data released Thursday showed U.S. business activity accelerated in May to the highest level in just over two years, leading to a pullback in expectations for U.S. interest rate cuts and a rise in Treasury yields.
This followed the Fed’s meeting in late April, which showed growing concerns among policymakers about persistent inflation, lending weight to comments from numerous officials calling for caution in easing monetary policy.
The CME Fedwatch tool showed traders projecting a nearly equal probability of a cut as a hold in September (about 46%), after previous expectations had shown a greater than 50% chance of a cut.
The next major release will likely be the Fed’s preferred inflation gauge, due on May 31.
This will likely provide further hints as to whether the country is able to start cutting interest rates later this year.
Sterling falls after weak UK retail sales
In Europe, yields fell to 1.2696 after data showed Britain fell more than expected in April, down 2.3% month-on-month, as wet weather kept shoppers away from clothing retailers and sports stores.
“Markets are only expecting a easing of 33 basis points at year-end and less than 10 basis points for the August meeting. We still expect a cut in August and view any thoughts of a delayed easing due to the British mood as misplaced,” ING analysts said in a note.
traded 0.1% higher to 1.0821, after growing 0.2% in the first three months of 2024, the statistics agency said on Friday, confirming preliminary data.
“After GDP fell at the end of 2023, the German economy started 2024 with positive growth,” said Ruth Brand, president of the statistics office.
“Given the risk of higher inflation in the Eurozone and markets that have lately shown a tendency to look on the bright side of US price dynamics, the coming days could see a revival of bullish sentiment on the EUR/USD. A return to 1.0900 seems more likely in the short term than a drop to 1.0700,” ING said.
The economy is widely expected to begin its interest rate cutting cycle next month.
The yen is nearing a three-week high
In Asia, it rose 0.1% to 157.07, with the pair rising to a more than three-week high, continuing its recovery from lows reached in the immediate aftermath of government intervention earlier in May.
The yen saw little relief from consumer price indices, which showed inflation easing in April as expected as spending remained weak.
traded 0.1% higher at 7.2448, near a six-month high, with further yuan weakness limited by a significantly stronger midpoint fix from the People’s Bank of China.
The stronger resolution came as a simmering trade war with the US, doubts over more stimulus and increased tensions with Taiwan caused a wave of selling pressure on the yuan.
