Dollar edges higher ahead of PCE; monthly fall likely

Investing.com - The U.S. dollar edged higher Friday ahead of the release of key inflation data, but the currency was still on track for a monthly drop on growing U.S. rate cut wagers.

At 05:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 97.815, but on course for a 1.8% decline for the month. 

The index is down nearly 10% this year as erratic U.S. trade policies drove investors towards alternative assets.

PCE data in focus

The U.S. currency has traded in a tight range Friday ahead of the release of the personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, later in the session.

Expectations are for the core PCE to have stayed steady at 0.3% on a monthly basis, 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,” said analysts at ING, in a note.

There is the risk the data may reveal more evidence of U.S. President Donald Trump’s sweeping tariffs filtering into consumer prices, following a recent upside surprise in producer inflation.

The Fed lowered its policy rate by a full percentage point last year, but has held rates steady this year, much to the chagrin of Trump.

The dollar has been on the backfoot this week following Trump’s attempt to fire Fed Governor Lisa Cook over alleged mortgage fraud, raising concerns about increased political influence over monetary policy. 

Cook filed a lawsuit on Thursday claiming Trump has no power to remove her from office, setting up a legal battle that could challenge long-established norms for the U.S. central bank’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 spotlight 

In Europe, EUR/USD dropped 0.1% to 1.1693, after data showed that French consumer prices rose slightly less than anticipated in August, with the country’s harmonised inflation rate coming in at +0.8% year-on-year in August, down from a +0.9% rise in July.

Spain’s European Union-harmonised 12-month inflation rate remained at 2.7% in August, from the period through July, and the equivalent German data is scheduled for later in the session, ahead of the flash August reading for the euro area next Tuesday.

The European Central Bank left its key rate at 2% at its July meeting, and data since then has confirmed the eurozone economy was holding up while inflation hovered at 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 traded 0.3% lower to 1.3475. 

Calm Asian trading

Elsewhere, USD/JPY climbed 0.1% to 147.01 after data on Friday showed that Tokyo’s consumer inflation eased in August as expected, but sticky underlying price pressures kept alive bets that the Bank of Japan may deliver further rate hikes.

Other data showed that Japan’s factory output fell more than expected in July amid tariff headwinds, while retail sales figures disappointed.

USD/CNY gained 0.1% to 7.1325, while AUD/USD edged 0.1% higher to 0.6535.