FOREX-Dollar steadies but set for weekly drop as focus shifts to Fed, BOJ meetings

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Sentiment boosted by US-Japan deal this week

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Markets pause ahead of Fed, BOJ policy meetings next week

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Eyes on US-EU trade deal negotiations

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Markets shrug off Trump's Fed visit

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Pound weakens on euro and dollar after soft economic data

(Updates with early European trading)

By Ankur Banerjee and Alun John

SINGAPORE/LONDON, July 25 (Reuters) - The dollar index was set for its biggest weekly drop in a month as investors contended on Friday with tariff negotiations and positioned for central bank meetings next week, while the pound dipped after softer-than-expected British retail sales data.

Both the U.S. Federal Reserve and the Bank of Japan are expected to hold rates steady at next week's policy meetings, but traders are focusing on the subsequent comments to gauge the timing of the next move.

Politics is a factor for both central banks as well, most dramatically in the U.S., where President Donald Trump once again pressed the case for lower interest rates on Thursday, locking horns with Fed Chair Jerome Powell during a visit to the central bank.

The dollar managed to rebound a touch against the euro late on Thursday, however, after Trump said he did not intend to fire Powell, as he has frequently suggested he could.

"The market relief was based on the fact that Trump refrained from calling for Powell to go, although that was based on Trump's view that Powell would 'do the right thing'," said Derek Halpenny, head of EMEA research at MUFG.

He added, however, that "the theme of Fed independence being undermined by the White House will unlikely go away and remains a downside risk for the dollar".

Falls against euro and yen leave the dollar index , which measures the dollar against six other currencies, at 97.45, on track for a drop of 1% this week, its weakest performance in a month. It was up 0.15% on the day on Friday.

Meanwhile, in Japan, though the trade deal signed with the U.S. this week could make it easier for the BOJ to continue rate hikes, Prime Minister Shigeru Ishiba's coalition's bruising loss in upper house elections on Sunday

complicates life for the BOJ

.

Prospects of big spending could keep Japanese inflation elevated, suggesting swifter tightening, while potentially prolonged political paralysis and a global trade war provide compelling reasons to go slow on rate hikes.

The yen stood at 147.20 to the dollar, on course for a weekly gain of around 1%, although it was weaker on the day as investors weighed the monetary policy outlook and Ishiba's fate.

The euro was up a whisker at $1.1756 and also set for a weekly gain of around 1%.

CROSS-CHANNEL DIVERGENCE

The common currency took some support Thursday from the European Central Bank meeting. Policymakers left the policy rate at 2%, as expected, but the bank's relatively upbeat assessment of the economic outlook and signs that an EU-U.S. trade deal is near caused investors to reassess previous assumptions of one more rate cut this year.

"While a renewed deterioration on the trade front, or a more marked near-term fall in inflation, could still prompt the ECB to cut again, there appears to be a strong bias to keep policy on hold," said Paul Hollingsworth, head of developed markets economics, BNP Paribas Markets 360.

"We think the (easing) cycle is over."

In contrast, soft British data is supporting expectations of more Bank of England rate cuts, and causing euro zone bond yields to rise faster than British ones, supporting the euro against the pound.

The euro was up 0.23% on sterling at 87.26 pence on Friday, its highest since April, building on a 0.44% gain the previous day.

Data on Friday showed British

retail sales data

for June slightly below analysts' expectations, albeit rebounding from a sharp drop in May, after figures on Thursday showed business

activity

grew only weakly in July and employers cut jobs at the fastest pace in five months.

The pound was down 0.3% on the dollar at $1.3471.

(Reporting by Alun John in London and Ankur Banerjee in Singapore; Editing by Clarence Fernandez and Kevin Liffey)