Dollar Index and Recent Movements

The dollar index saw a slight rise of 0.12% on Thursday, recovering from an oversold condition following Wednesday's dovish U.S. data. This recovery was bolstered by an unexpected surge in April U.S. import prices and reaffirmations from Federal Reserve officials that further dovish data would be necessary before considering rate cuts.

EUR/USD Performance

EUR/USD fell by 0.13%, capping its recent rally near 1.09, just below the highs reached in April. The decline in the euro was partly due to a slight rise in shorter-term Treasury yields compared to bund yields. However, the pair remained positively correlated with the S&P 500, which hit another record high, weighing on the dollar's haven appeal.

Market Focus and Economic Indicators

Looking ahead, the market's attention is focused on upcoming economic indicators that could influence Fed policy. The central bank continues to signal caution regarding rate cuts. The U.S. CPI and retail sales data from Wednesday highlighted a weaker-than-expected economic environment that still needs further dovish data to justify monetary easing.

Japan's Economic Challenges

Japan's disappointing GDP data raises doubts about the practicality of further BoJ policy normalization, especially as the yen remains near 34-year lows, not significantly benefiting the overall economy. This economic backdrop sets the stage for potential volatility as traders anticipate more data towards the end of the month.

Currency Market Movements

In the currency markets, USD/JPY experienced a significant turnaround. It initially fell 1.3% in response to Wednesday's data but later recovered to close 0.25% higher. The rebound was triggered by Japan's weak GDP report, questioning the feasibility of BoJ rate hikes amid persistent economic challenges.

Euro and Sterling Dynamics

The euro's advance was capped as it faced technical resistance and relative yield dynamics. Sterling also fell by 0.12%, hitting overbought conditions near the daily cloud top and April's peaks. A less hawkish tone from an MPC member ahead of the UK CPI release contributed to the pound's decline, though its fall was cushioned by a generally risk-on market sentiment.

Outlook for Major Currencies

The outlook for major currencies remains tied to upcoming economic data and central bank communications. For the dollar, further signs of economic weakness or strength will be crucial in shaping expectations for Fed rate cuts, with markets currently pricing in reductions by September and December. The euro and sterling will also be sensitive to economic reports, particularly those that could influence ECB and BoE policy directions. In Japan, the focus will be on whether the BoJ can justify any policy shifts in light of ongoing economic difficulties. Overall, the interplay between economic data and central bank policy will continue to drive currency movements, with traders closely monitoring these developments to adjust their positions accordingly.