May 24 2024: The U.S. dollar edged lower in early European trade Friday but remained on course for its largest weekly rise in over a month as expectations for early Federal Reserve rate cuts faded.
By 04:40 ET (08:40 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, traded 0.1% lower at 104.910. Despite this dip, it was set for a 0.6% gain this week, marking its largest one-week rise since mid-April.
Dollar Supported by Reduced Rate Cut Expectations
Data released on Thursday showed U.S. business activity accelerating to its highest level in just over two years in May. This prompted a reduction in expectations for U.S. interest rate cuts and an increase in government bond yields.
Minutes from the Fed’s late-April meeting indicated that policymakers were increasingly concerned about persistent inflation, bolstering the case for maintaining a cautious approach to monetary policy.
According to the CME Fedwatch tool, traders are now pricing in a nearly equal probability of a rate cut or a hold in September, around 46%, down from earlier expectations of over a 50% chance of a cut.
The next significant data release will be the personal consumption expenditures price index, the Fed’s preferred inflation gauge, due on May 31. This data will likely provide further insights into the Federal Reserve’s potential rate decisions for later this year.
Sterling Slips After Weak UK Retail Sales
In Europe, GBP/USD edged lower to 1.2696 after data showed British retail sales fell by more than expected in April, dropping by 2.3% on a monthly basis due to wet weather deterring shoppers from clothing retailers and sports stores.
“Markets are pricing in only 33bp of easing by year-end and less than 10bp for the August meeting. We still expect an August cut and see any views for delayed easing due to the U.K. vote as misplaced,” noted analysts at ING.
Euro Gains After German Economic Growth
EUR/USD traded 0.1% higher to 1.0821 after the German economy grew by 0.2% in the first quarter of 2024, according to the statistics office, confirming preliminary data.
“After GDP declined at the end of 2023, the German economy started 2024 with positive growth,” said Ruth Brand, president of the statistics office.
ING analysts suggested that the euro could gain further, stating, “Given the risk of some hotter eurozone inflation and markets having shown a tendency to look on the brighter side of U.S. price dynamics of late, the coming days may revamp some bullish sentiment on EUR/USD. A return to 1.0900 seems more likely than a drop to 1.0700 in the near term.”
The European Central Bank is widely expected to begin its rate-cutting cycle next month.
Yen Climbs to Three-Week High
In Asia, USD/JPY gained 0.1% to 157.07, with the pair rising to a three-week high, extending a rebound from lows following government intervention earlier in May.
The yen showed little reaction to consumer price index data indicating inflation eased as expected in April, with spending remaining weak.
USD/CNY traded 0.1% higher at 7.2448, near a six-month high, with the yuan’s weakness being limited by a stronger midpoint fix from the People’s Bank of China. The stronger fix came amid a simmering trade war with the U.S., doubts over additional stimulus measures, and increased tensions with Taiwan, all contributing to selling pressure on the yuan.
