Strong Japan GDP lifts yen, dollar steady as rate cut fervour cools slightly

Dollar on course to end week flat against EUR; lower against JPY, GBP.

The dollar was largely steady against the euro and British pound on Friday as traders trimmed wagers on monetary policy easing by the U.S. Federal Reserve following hotter-than-expected wholesale inflation data.

The Japanese yen, meanwhile, firmed broadly following surprising strong economic growth data as export volumes held up well against new U.S. tariffs.

The yen was up 0.4% against the dollar at 147.125 and rose 0.3% versus both the euro and British pound as well.

U.S. Treasury Secretary Scott Bessent’s remarks that the Bank of Japan could be ” Behind the curve” in dealing with the risk of inflation proved to be another tailwind for the yen this week. The yen has gained nearly 0.5% versus a softer U.S. dollar on the week.

The remarks, combined with the upside surprise on GDP, imply that expectations of a BOJ rate hike are likely to solidify and the yen could strengthen further, analysts at DBS said in a note.

Overnight, markets had to contend with data showing U.S. producer prices rose the most in three years in July amid a surge in the costs of goods and services, pointing to a broad pick up in inflationary pressures which analysts say could pose a dilemma for the Fed.

Bets on a 25-basis-point cut by the U.S. central bank in September remain very high but retreated slightly after the producer price figures, according to CME’s FedWatch tool.

A combination of supportive data and remarks from the U.S. treasury secretary had given rise to the possibility of an outsized 50-basis-point rate cut in September, but those expectations were wiped out entirely after Thursday’s data.

The Fed will likely cut rates in September as “not only is it being encouraged by the Trump administration but is also being priced by the markets,” said Ben Benett, APAC investment strategist at Legal and General Investment Management.

But analysts also reckon that signs of weakness in the U.S. labour market combined with inflation pointing to the impact of trade tariffs could present a dilemma for the Fed’s rate cut trajectory.

Remarks from Fed Chair Jerome Powell are likely to be in focus next week to gauge his assessment of U.S. economic conditions and the future path of benchmark interest rates.

Against the dollar, the euro and sterling were little changed after falling 0.5% and 0.3%, respectively, in the previous session ahead of the U.S. retail sales data.

A key factor to watch for the greenback would be how the bond market digests increased amounts of government debt issuance in September and October, said Alex Hill, managing director at Electus Financial Ltd in Auckland

The Australian dollar was nearly flat versus the U.S. dollar while the Chinese yuan pulled back from a two-week high as weaker-than-expected economic readings weighed on sentiment.

Investors are also awaiting a summit between U.S. President Donald Trump and Russian leader Vladimir Putin later on Friday in Alaska.

Trump said on Thursday that he believes Putin is ready to end his war in Ukraine, but peace would likely require at least a second meeting involving Ukraine’s leader.

The meeting “feels like a step in the process instead of a fireworks moment,” Legal and General Investment Management’s Benett said, pointing to muted market expectations from the summit.

Elsewhere, Bitcoin and ether rose after dropping about 4% each on Thursday. Bitcoin had at one point touched a record high on Thursday on shifting Fed rate-cut expectations.

© ZAWYA