May 31 2024: The U.S. dollar edged higher in early European trade on Friday, rebounding from the previous session’s losses in anticipation of key inflation data that could influence future interest rate expectations.
As of 04:30 ET (08:30 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, rose 0.1% to 104.735, recovering from an overnight low of 104.63.
Dollar Slips After Weak GDP Data
The dollar weakened on Thursday after official data revealed that the U.S. economy grew at an annualized rate of 1.3% in the first quarter, down from an initial estimate of 1.6%.
This indication of slowing growth led markets to increase the likelihood of rate cuts beginning in September to 55%, up from 51% the previous day, according to the CME Group’s (NASDAQ
) FedWatch Tool.
Despite this, inflation remains a concern for the Federal Reserve, with several officials warning against premature interest rate cuts.
Dallas Federal Reserve Bank President Lorie Logan stated on Thursday that, while she believes inflation is trending toward the Fed’s 2% target, it is too soon to consider cutting interest rates.
Traders are now awaiting the release of the PCE price index data on Friday, the Fed’s preferred inflation measure, to confirm whether inflation remains persistently high.
Euro Slips on Weak German Retail Sales
In Europe, EUR/USD traded 0.1% lower to 1.0823 after German retail sales fell by 1.2% in April compared to the previous month, a sharper decline than expected.
This reflects the struggles consumers face in the eurozone’s largest economy as the European Central Bank prepares to cut interest rates next week. However, uncertainty surrounds the central bank’s next move regarding interest rates, making the eurozone’s May inflation release later in the session a focal point.
The eurozone CPI is expected to rise by 2.5% year-on-year, up from 2.4% the previous month, with potential for an upside surprise following Germany’s stronger-than-expected April inflation reading on Wednesday.
GBP/USD fell 0.2% to 1.2712, retreating from Tuesday’s high of 1.2801, its highest level since March 21.
Weak Japanese CPI
In Asia, USD/JPY traded 0.3% higher to 157.23, rebounding from a sharp overnight decline.
Consumer price index data from Tokyo showed that inflation in Japan’s capital grew as expected in May but remained relatively weak. Soft inflation is negative for the yen as it reduces the Bank of Japan’s incentive to raise interest rates.
USD/CNY rose 0.2% to 7.2438, nearing the six-month highs reached earlier this week.
Purchasing managers index data indicated that Chinese business activity deteriorated in May after showing improvement over the past two months. The manufacturing PMI unexpectedly fell back into contraction, while the non-manufacturing PMI grew at a slower-than-expected rate.
These readings present new challenges for the Chinese economy and increase expectations of additional stimulus spending from Beijing to support growth. Such spending, likely involving looser monetary conditions, is expected to weigh on the yuan.