In early European trading on Friday, the U.S. dollar experienced a slight uptick, rebounding from losses in the previous session as investors awaited key inflation data that could shape future interest rate expectations.
At 04:30 ET (08:30 GMT), the Dollar Index, tracking the greenback against a basket of six other currencies, edged up by 0.1% to 104.735, recovering from overnight lows of 104.63.
Dollar’s Movement Following Weak GDP Data
The dollar retreated on Thursday following official data revealing that the U.S. economy expanded at an annualized rate of 1.3% in the first quarter, lower than the initial estimate of 1.6%. This indication of slowing growth led to increased market expectations of rate cuts, with the CME Group’s FedWatch Tool showing a 55% chance of rate cuts commencing in September, up from 51% the previous day.
Despite concerns over slowing growth, inflation remains a focal point for the Federal Reserve, with several officials cautioning against premature interest rate cuts. Dallas Federal Reserve Bank President Lorie Logan emphasized that while inflation is projected to reach the Fed’s 2% target, it is premature to consider rate cuts at this stage.
Market participants await confirmation from Friday’s release of the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation metric, to gauge the persistence of inflationary pressures.
Euro’s Decline Post Weak German Retail Sales
EUR/USD traded 0.1% lower at 1.0823 after German retail sales for April fell more than anticipated, declining by 1.2% compared to the previous month. This highlights challenges faced by consumers in the eurozone’s largest economy, particularly as the European Central Bank gears up for potential interest rate cuts next week.
Market uncertainty surrounds the ECB’s forthcoming interest rate decisions, underscoring the significance of the eurozone’s May inflation release later in the session.
GBP/USD slipped by 0.2% to 1.2712, marking its lowest level since March 21.
Asian Market Dynamics
In Asia, USD/JPY rose by 0.3% to 157.23 after a notable decline in overnight trading. Tokyo’s consumer price index data for May showed expected growth in inflation, albeit at relatively subdued levels. Soft inflationary trends diminish the case for the Bank of Japan to consider interest rate hikes.
USD/CNY traded 0.2% higher at 7.2438, approaching six-month highs recorded earlier in the week.
Impact of Chinese PMI Data
Chinese business activity weakened in May, with manufacturing PMI unexpectedly contracting and non-manufacturing PMI growing at a slower-than-expected pace. While these readings pose challenges for the Chinese economy, they also prompt expectations of increased stimulus measures from Beijing to bolster growth. However, such stimulus efforts, likely involving looser monetary conditions, could adversely affect the yuan.
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