The U.S. dollar inched higher on Friday as investors awaited the release of critical inflation data, though the currency is still positioned for a monthly decline amid increasing expectations for a U.S. rate cut.
At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against six other major currencies, rose 0.1% to 97.815, but is still set for a 1.8% drop for August. The index has lost nearly 10% this year as uncertain U.S. trade policies pushed investors toward alternative assets.
Eyes on PCE
Markets focused on the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, scheduled for release later in the session.
Analysts anticipate core PCE remained at 0.3% month-on-month, putting 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,” ING analysts noted.
There is also a risk the data could reveal additional effects of U.S. President Donald Trump’s broad tariffs filtering into consumer prices, following a recent surprise jump in producer inflation.
The Federal Reserve cut its policy rate by a full percentage point last year but has left rates steady this year, frustrating Trump.
The dollar weakened this week after Trump attempted to fire Fed Governor Lisa Cook over alleged mortgage fraud, raising concerns about political influence on monetary policy. Cook filed a suit on Thursday arguing that Trump lacks the authority to remove her, setting up a legal challenge that could test long-standing Fed independence norms.
“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 also in focus
EUR/USD fell 0.1% to 1.1693 after French consumer prices rose slightly below expectations 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 stayed at 2.7%, while Germany’s equivalent data are expected later, ahead of the flash eurozone August reading next Tuesday.
The ECB held its key rate at 2% in July, with subsequent data showing the eurozone economy remains resilient and inflation near the 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,” ING said.
GBP/USD dropped 0.3% to 1.3475.
Asian session calm
USD/JPY rose 0.1% to 147.01 after Tokyo’s consumer inflation eased in August as expected, but sticky underlying prices maintained bets on further Bank of Japan rate hikes.
Japan’s factory output fell more than anticipated in July amid tariff pressures, while retail sales missed expectations.
USD/CNY increased 0.1% to 7.1325, and AUD/USD climbed 0.1% to 0.6535.
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