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The U.S. dollar rebounded in early European trading on Friday, recovering from previous losses as traders awaited the release of key inflation data, which could significantly influence future interest rate expectations.
At 04:30 ET (08:30 GMT), the Dollar Index, tracking the greenback against a basket of six other currencies, rose 0.1% to 104.735 after briefly dipping to 104.63 overnight.
Dollar’s Slide Following Weak GDP Data
The dollar retreated on Thursday after official data revealed a weaker-than-expected U.S. economic growth rate of 1.3% in the first quarter, down from the initial estimate of 1.6%. This slowdown led markets to price in a 55% chance of rate cuts starting in September, up from 51% the day before.
Despite the weaker growth figures, inflation remains a pressing concern for the Federal Reserve, with several officials cautioning against early interest rate cuts. Dallas Federal Reserve Bank President Lorie Logan emphasized that while inflation is moving towards the Fed’s 2% target, it’s too early to contemplate rate reductions.
Traders eagerly await Friday’s release of the PCE price index, the Fed’s preferred inflation gauge, for confirmation that inflation remains stubbornly high.
Euro Weakens on Disappointing German Retail Sales
In Europe, the EUR/USD pair traded 0.1% lower at 1.0823, following weaker-than-expected German retail sales data for April, which showed a 1.2% decline compared to the previous month.
This data highlights the challenges faced by consumers in the eurozone’s largest economy as the European Central Bank prepares to cut interest rates next week.
However, uncertainty surrounding the central bank’s future interest rate decisions persists, placing significant emphasis on the upcoming release of eurozone May inflation data. The eurozone CPI is projected to rise 2.5% year-on-year, up from 2.4% in April, with the potential for an even higher figure given a stronger-than-expected April inflation reading for Germany.
GBP/USD fell 0.2% to 1.2712, retreating from its recent high of 1.2801 reached on Tuesday.
Japanese CPI Remains Weak
In Asia, the USD/JPY pair increased 0.3% to 157.23, rebounding from overnight losses. Consumer price index data from Tokyo revealed that inflation in Japan’s capital grew as expected in May, although it remained relatively subdued. This weak inflation outlook poses a challenge for the yen, as it diminishes the Bank of Japan’s incentive to raise interest rates.
USD/CNY edged up 0.2% to 7.2438, nearing the six-month highs reached earlier this week. Purchasing managers index data indicated a deterioration in Chinese business activity in May following some improvement in the previous two months. The manufacturing PMI unexpectedly fell back into contraction territory, while non-manufacturing PMI grew at a slower pace than anticipated.
While these readings present headwinds for the Chinese economy, they have also fueled expectations of increased stimulus measures from Beijing to support growth. However, such spending, likely involving looser monetary conditions, could put downward pressure on the yuan.
