The U.S. dollar nudged higher on Friday as markets awaited key inflation figures, though the currency is on track for a monthly decline amid growing bets on a U.S. rate cut.
At 05:20 ET (09:20 GMT), the Dollar Index, which measures the greenback against a basket of six other currencies, was up 0.1% at 97.815, but still poised for a 1.8% drop for the month. The index has fallen almost 10% this year as volatile U.S. trade policies have driven investors toward alternative assets.
PCE data takes center stage
The dollar traded in a narrow range ahead of the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, scheduled for release later in the session.
Expectations are that core PCE held steady at 0.3% month-on-month, keeping the annual rate at 2.9%.
“A slightly higher print could prompt a modest positive dollar reaction, but the bar for a rethink of the strong call for a September cut is high following Powell’s dovish remarks at Jackson Hole,” analysts at ING said in a note.
There is also the possibility the data could show further evidence of U.S. President Donald Trump’s broad tariffs affecting consumer prices, following recent upside surprises in producer inflation.
The Federal Reserve cut its policy rate by a full percentage point last year but has kept rates steady this year, much to Trump’s frustration.
The dollar has struggled this week following Trump’s attempt to remove Fed Governor Lisa Cook over alleged mortgage fraud, sparking concerns about political influence on monetary policy. Cook filed a lawsuit on Thursday claiming that Trump has no authority to remove her, setting the stage for a legal battle that could challenge long-standing norms on the Fed’s independence.
“While markets remain reluctant to speculate on this Fed story and continue to focus on data-driven short-term developments, the downside risks for the dollar have undoubtedly grown,” ING added.
European inflation data in focus
In Europe, EUR/USD fell 0.1% to 1.1693 after French consumer prices rose slightly less than expected in August, with the harmonized inflation rate at +0.8% year-on-year, down from +0.9% in July. Spain’s EU-harmonized 12-month inflation held at 2.7% in August, and Germany’s equivalent figures are due later, ahead of the flash August reading for the eurozone next Tuesday.
The ECB left its main rate at 2% in July, and recent data confirms the eurozone economy remains stable with inflation near the ECB’s 2% target.
Additionally, “the European Central Bank’s July minutes showed the Governing Council isn’t as concerned about the euro’s strength as some had speculated, but multiple members did point to downside risks to inflation and that, in our view, still suggests market pricing for year-end (-10bp) is too hawkish,” said ING.
GBP/USD slipped 0.3% to 1.3475.
Calm trading in Asia
In Asia, USD/JPY rose 0.1% to 147.01 after data showed Tokyo’s consumer inflation eased in August as expected, but persistent underlying price pressures kept rate hike bets alive for the Bank of Japan.
Other figures revealed Japan’s factory output fell more than expected in July amid tariff headwinds, while retail sales disappointed.
USD/CNY gained 0.1% to 7.1325, and AUD/USD edged up 0.1% to 0.6535.
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