Dollar fell in European trade on Friday against a basket of major rivals, giving up one-week highs and on track for the first loss in seven days on profit-taking.

Despite the decline, the greenback is heading for the best weekly profit in a month and a half after the Fed's latest meeting minutes reduced the odds of multiple rate cuts this year. 

Now investors await important remarks by Fed official Christopher Waller later today in addition to consumer sentiment and US inflation data. 

The Price

The dollar index fell 0.2% today to 104.82, with a session-high at 105.12. 

The index rose 0.15% on Thursday, the sixth profit in a row, marking a one-week high at 105.12 following strong US data.

Weekly Trades 

The index is up 0.5% so far this week on track for the second weekly profit in three weeks, and the largest since early April.

Fed’s Minutes 

The minutes showed that Fed officials are concerned about the suitable timing of a rate cut, with several members expressing concerns about consumers using riskier financing methods to cover costs due to inflation.

Fed officials pointed to the persistent risks of inflation, with factors including geopolitical events, and they focused on the impact on consumers, especially low-income workers. 

The Fed recently announced a decision to maintain interest rates unchanged at below 5.5% at the May meeting. 

Strong Data

Recent US data showed unemployment claims fell more than expected last week while both the services and manufacturing sectors expanded. 

US Rates

The odds of a Fed July 0.25% rate cut are currently standing at 14%, while the odds of a September cut fell to 54%. 

According to the Fedwatch tool, investors now only expect one interest rate cut by the Federal Reserve this year. 

Waller

Later today, Famously hawkish Fed official Christopher Waller is expected to speak later today about the future of inflation and interest rates.

Otherwise, the University of Michigan will release important data on consumer sentiment and five-year inflation forecasts. 

Sterling fell in European trade on Friday against a basket of major rivals, extending losses for the second day against the US dollar and moving away from two-month high on profit-taking, following grim UK data. 

Earlier UK data showed the economy might be shrinking faster than expected, which could prompt the Bank of England to accelerate plans to ease policies. 

The Price

The GBP/USD fell 0.2% to $1.2676, with a session-high at $1.2700. 

The pair lost 0.15% yesterday, the first loss in five days away from a two-month high at $1.2761. 

Grim Data

Earlier UK data showed retail sales fell 2.3% in April, the worst pace since December, and passing estimates of a 0.5% drop.

The data shows the UK GDP is likely shrinking faster than expected in the second quarter, as retail sales and consumer spending represent over 70% of total GDP.

UK Rates

There’s now a 50% chance the Bank of England will cut interest rates in June, and an 80% chance of such a cut in August.

Interest Rate Gap 

The current UK-US interest rate gap stands at 25 basis points in favor of the US, the lowest such gap since March 2022, and it’ll likely widen to 50 basis points in June if the BOE went ahead with an interest rate cut, in turn weighing on the pound. 

Yen declined in Asian trade on Friday against a basket of major rivals, extending losses for the third straight session against the dollar and almost touching three-week lows, under close supervision of the Bank of Japan which could intervene at any time. 

Recent government data showed inflationary pressures have receded on BOJ policymakers, further damaging the odds of Japanese rate hikes this year. 

The Price

The USD/JPY pair rose 0.2% today to 157.15 yen, with a session-low at 156.88, after losing 0.1% on Thursday, the second loss in a row, plumbing three-week lows at 157.20. 

Earlier US manufacturing, services, and labor data beat expectations, in turn hurting the odds of a Fed rate cut in the summer.

The 160 Red Line 

The 160 has become a red line for the Bank of Japan, so it’s likely it’ll intervene if the USD/JPY pair threatens to fall once again below it. 

Japanese authorities intervened in late April and pumped $60 billion in the forex market to bring the yen higher against main rivals after it hit 1990 lows. 

Transient Intervention 

Analysts believe that any intervention by the Bank of Japan would only lead to a transient spike in yen’s value, as the fundamentals of the stark US-Japan interest rate gap continues to favor the dollar against the yen. 

Rate Gap

The current US-Japan interest rate gap stands at 540 basis points in favor of the US.

Such a gap could shrink once or twice this year as the Federal Reserve prepares to cut interest rates and ease policies.

Japanese Inflation 

Earlier government data showed Japan’s consumer prices, excluding fresh food, rose 2.2% y/y in April, matching expectations, after rising 2.6% in March.

Slower prices indicate that inflation has been largely brought under control, reducing pressure on the BOJ.

The New Zealand dollar stabilized on Thursday after the release of data and the policy decisions of the central bank.

Earlier government data showed retail sales rose 0.5% in the first quarter, while analysts expected a 0.3% drop.

Core sales rose 0.4%, while analysts expected no change. 

The Reserve Bank of New Zealand recently decided to hold interest rates unchanged at 5.5%. 

On trading, NZD/USD stabilized at 0.6098 as of 21:04 GMT.

Sterling 

The pound fell 0.2% against the US dollar as of 21:05 GMT to 1.2692.

The UK manufacturing PMI rallied to 51.3 from 49.5 in the previous reading. 

On the other hand, the services PMI slid to 52.9 from 54.7 in the previous reading.

The US Dollar

The dollar index rose 0.1% as of 20:43 GMT to 105.07, with a session-high at 105.1, and a low at 104.6. 

Earlier US data showed unemployment claims fell to 215 thousand last week from 223 thousand.

The US manufacturing PMI rose to 50.9 in May from 50. 

The services PMI jumped to 54.8 this month, while analysts expected a drop to 51.2.