Investing.com – The U.S. dollar fell in early European trading on Friday, but is still on track for its biggest weekly gain in more than a month as expectations of early interest rate cuts by the Federal Reserve fade.

At 04:40 ET (08:40 GMT), the Dollar Index, which tracks the dollar against a basket of six other currencies, was trading 0.1% lower at 104.910, but was on track to gain 0 this week .6%, which was its largest weekly escalate since mid-April.

Dollar strengthened by lower expectations for interest rate cuts

Data released on Thursday showed that U.S. business activity accelerated to its highest level in just over two years in May, which led to a withdrawal of expectations for U.S. interest rate cuts and an escalate in government bond yields.

That followed a Fed meeting in delayed April that showed policymakers were increasingly concerned about persistent inflation, adding weight to comments from numerous officials advising caution in loosening monetary policy.

CME’s Fedwatch tool showed that in September, investors priced in an almost equal chance of a cut and a hold – about 46% – after earlier expectations put the chance of a cut at more than 50%.

The next data release will likely be the Fed’s preferred inflation rate, which will be released on May 31.

This will likely provide further clues as to whether the government is able to start cutting interest rates later this year.

Sterling is losing ground after delicate retail sales in the UK

In Europe, it fell to 1.2696 after data showed the British index fell by more than expected in April, falling 2.3% on the month as damp weather kept shoppers away from clothing and sports retailers.

“Markets are pricing in only 33 bp of monetary policy easing by the end of the year and less than 10 bp at the August meeting. We still expect a cut in August and believe that any view of a delayed easing in the wake of the UK vote is misplaced,” ING analysts said in a note.

increased by 0.1% to 1.0821, after an escalate of 0.2% in the first three months of 2024, the statistical office said on Friday, confirming preliminary data.

“After a contraction in GDP at the end of 2023, the German economy started 2024 with positive growth,” said Ruth Brand, president of the statistical office.

“Given the risk of higher inflation in the Eurozone and the fact that markets have recently shown a tendency to look on the brighter side of US price dynamics, the coming days may bring back some bullish sentiment on EUR/USD. A return to 1.0900 seems more likely than a decline to 1.0700 in the near future,” ING said.

It is widely expected that a cycle of interest rate cuts will begin next month.

Yen Climbs Near Three-Week High

In Asia, it gained 0.1% to 157.07 and the pair rose to a more than three-week high, extending the rebound from lows reached immediately after government intervention seen earlier in May.

The yen eased slightly after consumer price index data showed inflation fell in line with expectations in April amid continued low spending.

quoted 0.1% higher at 7.2448, near a six-month high, with further yuan weakening expected to be capped by a much stronger midpoint correction from the People’s Bank of China.

The stronger improvement came as a simmering trade war with the U.S., doubts about more stimulus measures and heightened tensions with Taiwan triggered a wave of yuan selling pressure.