The US dollar index is heading for its largest weekly decline in a month as investors brace for sensitive trade negotiations and central bank meetings next week. Meanwhile, the British pound fell following weaker-than-expected UK retail sales data.

Markets widely expect both the Federal Reserve and the Bank of Japan to leave interest rates unchanged in their upcoming policy meetings. However, attention will be focused on post-meeting statements to gauge the timing of any future policy shifts.

Politics are also playing a key role, particularly in the US, where President Donald Trump renewed his pressure on the Fed to lower rates during a Thursday visit to the central bank—a move seen as an escalation in his public feud with Fed Chair Jerome Powell.

Nevertheless, the dollar managed a modest rebound against the euro late Thursday after Trump said he had no intention of firing Powell—a threat he had previously hinted at multiple times.

Derek Halpenny, Head of Research for EMEA at MUFG, said: “The market took comfort in Trump not calling for Powell’s removal, although it was based on his belief that Powell would do ‘the right thing.’” He added, “The Fed’s independence, being undermined by the White House, remains a lingering concern and a downside risk for the dollar.”

Dollar Pressured by Euro and Yen Gains

Losses against the euro and yen weighed on the US Dollar Index, which measures the greenback’s performance against six major peers. The index dropped to 97.45, down roughly 1% for the week—its worst weekly showing in a month—though it did edge up 0.15% on Friday.

Yen Gains Despite Political Uncertainty

In Japan, although this week’s trade deal with the US could give the Bank of Japan more room to raise interest rates, the ruling party’s defeat in Sunday’s upper house elections complicates the outlook for monetary policy.

Expectations of increased government spending could fuel inflation, boosting the case for tighter policy. However, prolonged political gridlock and renewed global trade tensions argue for a more cautious stance.

The yen stood at 147.20 per dollar and is set to post a weekly gain of nearly 1%, despite Friday’s daily decline as investors reassessed the policy outlook and the future of Prime Minister Shigeru Ishiba’s administration.

Euro Set for Weekly Gain Versus Pound and Dollar

The euro rose slightly to $1.1756, heading for a weekly gain of about 1% as well. It was supported on Thursday by the European Central Bank’s decision to hold interest rates steady at 2%, as expected, while delivering a relatively upbeat tone on the economic outlook.

Hopes for a trade deal between the EU and the US also helped temper prior expectations of further rate cuts later this year.

Paul Hollingsworth, Head of Developed Markets Economics at BNP Paribas Markets 360, said: “While worsening trade conditions or a sharp fall in inflation might prompt further easing, the ECB appears inclined to hold policy steady. We believe the easing cycle is now complete.”

Weak UK Data Supports Euro Against Sterling

On the flip side, weak UK data has raised expectations for more rate cuts from the Bank of England. This is causing eurozone bond yields to rise faster than their UK counterparts, boosting the euro against the pound.

The euro rose 0.23% versus the pound to 87.26 pence, its highest level since April, after gaining 0.44% the previous day.

Friday’s data showed that UK retail sales for June missed expectations, despite recovering from a steep drop in May. Thursday’s figures also revealed weak July business activity and the fastest job cuts in five months.

The pound fell 0.3% against the dollar to $1.3471.

Gold prices declined in European markets on Friday, marking a third consecutive daily loss and retreating further from a five-week high. The drop comes as profit-taking continues, alongside a slowdown in safe-haven demand amid easing global trade tensions.

Meanwhile, the US dollar continues to recover in foreign exchange markets, supported by renewed buying from lower levels and ahead of next week’s Federal Reserve policy meeting.

The Price

• Gold fell 0.35% to $3,358.00 per ounce, down from the session open at $3,368.62, after recording a high of $3,373.62.

• On Thursday, gold settled 0.55% lower, posting its second straight daily loss amid ongoing corrections from the recent five-week peak of $3,438.94.

Trade Developments

Following the major trade agreement between the US and Japan, some EU Commission officials confirmed that the EU and the US are nearing a similar deal. The proposed agreement includes a 15% tariff on European imports, with some goods exempt from US tariffs.

US Treasury Secretary Scott Besant stated that US and Chinese officials will meet in Stockholm next week to discuss extending the trade negotiation deadline to August 12.

US Dollar

The US Dollar Index rose 0.1% on Friday, extending gains for a second session as the greenback continues to recover from a two-week low, supported by renewed buying against a basket of major and minor currencies.

Markets largely brushed off President Donald Trump’s visit to the Federal Reserve on Thursday, during which he clashed with Fed Chair Jerome Powell over renovation costs for historic buildings at the Fed's headquarters and demanded rate cuts — familiar rhetoric for investors.

US Interest Rates

• According to CME Group’s FedWatch Tool, the probability of a 25-basis-point rate cut at the July Fed meeting remains steady at 3%, while expectations for no change stand at 97%.

• For the September meeting, the probability of a 25-basis-point cut is stable at 62%, with a 38% chance of rates being held steady.

• Market focus remains on next week’s Fed meeting, expected to offer clearer guidance on the interest rate trajectory for the remainder of the year.

Gold Outlook

Kelvin Wong, Market Analyst for Asia-Pacific at OANDA, noted: “We’re basically seeing some profit-taking from short-term bullish speculators, as optimism surrounding a trade deal is starting to surface in the market.”

SPDR Gold Trust

Holdings in the SPDR Gold Trust — the world’s largest gold-backed exchange-traded fund — rose by 2.29 metric tons yesterday, bringing the total to 957.09 metric tons, the highest since June 23.

The euro declined at the open of European markets on Friday against a basket of global currencies, extending losses for a second consecutive session versus the US dollar and retreating from its two-week high as profit-taking and technical corrections persist.

Despite the drop, the single European currency remains on track for a weekly gain, buoyed by the hawkish tone of the European Central Bank’s latest meeting, during which it paused its monetary easing cycle.

This decision came amid ongoing uncertainty over the potential impact of higher US tariffs on economic activity in Europe, adding to doubts over the likelihood of a rate cut in September.

The Price

• EUR/USD fell 0.1% to $1.1734 as of today’s session open at $1.17477, after recording a high of $1.1759.

• On Thursday, the euro lost 0.2% — its first decline in five sessions — after hitting a two-week high of $1.1775 earlier in the day, with the dip attributed to correction and profit-taking.

Weekly Performance

Over the course of the week — set to conclude with Friday’s close — the euro is up approximately 0.95% against the dollar, on track to post its first weekly gain in three weeks.

European Central Bank

As expected, the ECB left its key interest rates unchanged on Thursday at 2.15%, maintaining the lowest level since October 2022 after seven consecutive rate cuts in previous meetings.

The central bank opted for a pause in its monetary easing, awaiting clarity on future US-EU trade relations. The European Commission stated that a negotiated solution is within reach ahead of the August 1 deadline.

The ECB noted that inflation is currently stable around 2%, aligning with its medium-term target. Incoming economic data, it said, remains broadly consistent with its prior inflation outlook.

Given today’s exceptional uncertainty, the ECB affirmed it would reassess economic and financial conditions at each meeting to determine the appropriate monetary stance.

Christine Lagarde

ECB President Christine Lagarde stated on Thursday: “Following today’s meeting, we can say we are in a wait-and-see mode.” She added that the eurozone economy has shown resilience despite global economic uncertainty.

Lagarde stressed that the ECB’s decisions are data-dependent and reaffirmed the commitment to achieving the 2% inflation target over the medium term. She also reiterated that the bank will follow a “meeting-by-meeting” approach with no preset interest rate path.

September Rate Expectations

• According to Reuters sources, a clear majority within the ECB favored keeping rates unchanged again in September — marking a second consecutive pause.

• Money market pricing for a 25-basis-point ECB rate cut in September has dropped from 50% to below 30%.

The Japanese yen declined on Friday during Asian trading against a basket of major and minor currencies, extending losses for a second consecutive session versus the US dollar and pulling away from its two-week high, as correction and profit-taking pressures persist.

This retreat follows data showing a slowdown in core inflation in Tokyo, easing price pressures on policymakers and reducing the likelihood of a rate hike by the Bank of Japan in next week's meeting.

Despite the decline, the yen remains on track to post a weekly gain amid ongoing political uncertainty in Japan, especially after the ruling party’s defeat in the upper house elections.

The Price

• USD/JPY rose by 0.35% to ¥147.49 as of today’s session open at ¥146.99, marking a low of ¥146.94.

• On Thursday, the yen fell 0.35% against the dollar — its first loss in four days — following correction-driven selling after touching a two-week high of ¥145.85 earlier in the session.

Tokyo Core Inflation Slows

Data released Friday showed Tokyo’s core consumer price index rose by 2.9% in July — the slowest pace since March — below market expectations of a 3.0% rise and down from 3.1% in June.

This deceleration significantly reduces inflationary pressure on the Bank of Japan, diminishing the likelihood of further rate hikes this year.

BOJ Rate Outlook

• Following the data, market pricing for a 25-basis-point rate hike by the BOJ in next week’s meeting dropped from 35% to below 20%.

• Deputy Governor Shinichi Uchida stated that the trade deal signed with Washington on Tuesday reduced economic uncertainty in Japan.

• His remarks fueled market optimism over the potential for resumed rate hikes later this year in the world’s fourth-largest economy.

Weekly Performance

As of the final day of the week, the yen is up approximately 0.9% against the dollar, poised to record its first weekly gain in three weeks.

Political Developments

Japanese Prime Minister Shigeru Ishiba denied reports of a pending resignation following a landslide electoral defeat for the ruling party.

“I shared a strong sense of crisis with former prime ministers, but I have not discussed resignation at all,” Ishiba stated.

Analyst Commentary

• Carol Kong, currency strategist at Commonwealth Bank of Australia, said: “The yen will continue to face headwinds amid lingering political uncertainty.”

• “We still don’t know what Prime Minister Ishiba plans to do… so there's ongoing ambiguity regarding fiscal outlook and BOJ policy,” she added.

Major US-Japan Trade Deal

On Tuesday, US President Donald Trump announced the signing of a “massive” trade agreement with Japan, featuring reciprocal 15% tariffs on Japanese exports to the US and a reduction in auto tariffs from 25% to 15%.

In a Truth Social post, Trump called the deal “perhaps the largest ever,” noting Japan will invest $550 billion in the US, while America will secure 90% of the profits.

The deal includes opening Japanese markets to US exports — particularly autos, trucks, rice, and other agricultural products — which Trump claimed will create “hundreds of thousands of jobs.”

Prime Minister Ishiba confirmed the reduction of US auto tariffs to 15%, describing it as a crucial step given the automotive sector’s dominant role in Japanese exports to the US, accounting for 28.3% of shipments in 2024.

Japan’s auto exports (including cars, buses, and trucks) to the US fell by 26.7% in June after a 24.7% decline in May.

Total exports to the US — Japan’s second-largest trading partner — amounted to ¥10.3 trillion ($70.34 billion) from January to June, down 0.8% year-on-year.