Dollar hands back some gains; Jackson Hole looms large

Investing.com - The U.S. dollar edged lower Friday, handing back some of the previous session’s hefty gains after the release of solid retail sales downplayed concerns about an Imminent U.S. recession.  

At 05:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 102.725, after climbing 0.4% overnight, its biggest one-day gain in four weeks. 

Jackson Hole could drive dollar sentiment 

Benign inflation data this week has pointed to the U.S. Federal Reserve starting to cut interest rates at its next meeting in September.

But the stronger-than-expected July retail sales release has soothed concerns that the central bank was behind the curve and would have to aggressively cut interest rates to prevent a recession.

This has helped the dollar recover from losses earlier this week, even though it’s still on course to end the week lower.

“The data has prompted investors to shift towards pricing a 25bp Federal Reserve rate cut on 18 September. However, there will be a myriad of data inputs into the Fed equation and the events calendar picks up next week,” said analysts at ING, in a note.

Next week’s highlight is the Federal Reserve’s annual Jackson Hole symposium, where Chairman Jerome Powell will have the opportunity to steer markets ahead of the next Fed policy-setting meeting.  

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range since last July, after hiking its policy rate by 525 basis points since 2022.

Sterling helped by retail sales

In Europe, GBP/USD traded 0.3% higher at 1.2891, after data showed British retail sales rose in July, rebounding after a disappointing June.

Retail sales volumes rose 0.5% in July after falling 0.9% in June and were 1.4% greater than a year earlier, the Office for National Statistics said.

The Bank of England cut interest rates for the first time in over four years at the start of August, but doubts remain over whether the central bank will agree to further rate cuts this year.

EUR/USD traded 0.1% higher to 1.0981, bouncing following a 0.4% slide in the previous session, but still near this week’s high of 1.1047, its highest level this year.

Yen edges higher

In Asia, USD/JPY fell 0.4% to 148.75, with the pair still close to the 150 level, having fallen as low as 141 yen last week amid a tumble in global risk-driven markets.

Still, the outlook for the yen appeared strong, especially as gross domestic product data this week showed the Japanese economy was picking up on the back of stronger wages. Strength in the economy is expected to give the Bank of Japan more headroom to raise interest rates further.

USD/CNY fell 0.1% to 7.1673, with the yuan a touch higher even though a swathe of mixed economic readings on China did little to improve sentiment towards the yuan, as did assurances of more stimulus measures from Beijing.

Focus now turns to a decision by the People’s Bank of China on its benchmark loan prime rate next week, after the PBOC unexpectedly cut rates in July.