Investing.com – The U.S. dollar edged higher in European trade Friday, but was on track for a hefty weekly fall after cooling inflation and weak retail sales brought Federal Reserve rate cuts back into focus. 

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.580, marginally above a five-week low just below 104 seen earlier this week.

Dollar steadies after hawkish Fed speak

The dollar has recovered to a degree as several Fed officials, specifically members of the bank’s rate-setting committee, said that they needed much more confidence that inflation was coming down, beyond some easing inflation in April.

“I now believe that it will take longer to reach our 2% goal than I previously thought,” St. Louis Federal Reserve president Loretta Mester said on Thursday, adding that further monitoring of incoming data will be needed. 

Federal Reserve Bank of New York President John Williams agreed with this view. 

“I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal in the very near term,” Williams said.

However, the dollar is still on course for a weekly loss of around 0.7% after the milder than expected U.S. data raised expectations the will deliver two interest rate cuts this year, probably starting in September.

U.S. were also flat in April and softer-than-expected, and manufacturing output unexpectedly fell.

“Our view for the near term remains that we could see a further stabilisation in USD crosses as markets await the next key data input: April core PCE on 31 May,” said analysts at ING, in a note.

Euro slips ahead of CPI release

In Europe, traded 0.1% lower to 1.0860, having traded as high as 1.0895 in the wake of U.S. inflation release, but the single currency is still up around 0.9% on the dollar this week.

The final reading of the is due later in the session, and is expected to show inflation rose by 2.4% on an annual basis in April.

The is widely expected to cut interest rates in June, but traders remain unsure of how many more cuts, if any, the central bank will agree to over the course of the rest of the year.

Traders have priced in 70 basis points of ECB cuts this year – a lot more than the just under 50 bps of easing priced in for the Fed.

fell 0.1% to 1.2658, but is still on track for gains of around 1% this week.

The Bank of England is also expected to cut rates from a 16-year high this summer, but volatility is likely to be limited ahead of the release of key U.K. inflation figures next week.

Yen slips after weak Japanese GDP data

In Asia, rose 0.3% to 155.87, close to breaking above 156, after weaker-than-expected Japanese data for the first quarter. 

traded 0.1% higher at 7.2209, moving back to six-month highs above 7.22 after data earlier Friday showed grew more than expected in April, but growth in slowed sharply, while a decline in Chinese house prices accelerated last month.

Broker ING noted the potential downside risks for the British pound, noting the currency’s recent decline from its peak against the euro. The GBP’s sensitivity to the performance of US equities was highlighted as a contributing factor to its movement.

The firm also observed a decrease in volatility for the pair as the market anticipates the release of key Consumer Price Index (CPI) figures in the UK scheduled for next week.

ING’s UK economist suggests that there may be a dovish tilt in expectations for the Bank of England’s (BoE) monetary policy. The firm maintains a favorable outlook on the possibility of the EUR/GBP pair rising, as market participants might increase their wagers on a potential interest rate cut by the BoE in June.

The British financial markets were focused on a speech delivered by Catherine Mann of the BoE, who is regarded as the most hawkish member of the Monetary Policy Committee (MPC).

This event followed comments made by Megan Greene, who recently shared a cautiously optimistic perspective on inflation, mirroring sentiments expressed by BoE Governor Andrew Bailey at the last meeting.

ING’s commentary comes as investors and analysts closely watch the central bank’s moves, which could significantly influence currency valuations. The anticipation of UK CPI data and the BoE’s potential response are key factors in the firm’s analysis of the GBP’s trajectory.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

The US dollar’s recent downtrend halted, aligning with forecasts by financial institution ING. Analysts observed that US economic data has not provided sufficient momentum to drive a significantly weaker dollar at this time.

This comes after jobless claims dropped to 222,000 from a previous week’s increase to 232,000. The labor market had shown similar patterns in January, with claims peaking at 225,000 before falling back to the range of 200,000 to 210,000.

ING anticipates a potential stabilization in USD currency pairs as investors await the release of the April core Personal Consumption Expenditures (PCE) price index, scheduled for May 31. The firm suggests that cross-asset volatility could remain subdued in the coming weeks, which may boost the search for carry trades.

Consequently, they express a lack of optimism for a recovery in the Japanese yen, currently deemed the most attractive funding currency.

In related developments, China’s latest economic figures influenced market sentiment. The country reported a 6.7% year-on-year increase in April industrial production, surpassing the expected 5.5%.

However, retail sales underperformed, registering a 2.3% growth against a forecasted 3.7%. According to ING’s economist, the data reflects ongoing caution among households and the private sector in China.

The US economic calendar for today includes the Leading Index, which is anticipated to have remained at -0.3% in April. Additionally, Federal Reserve officials Chris Waller, Neel Kashkari, and Mary Daly are scheduled to speak. ING forecasts the (DXY) to trade within the 104-105 range in the near term.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.