The U.S. dollar slipped again on Friday, extending its recent downturn ahead of an important inflation reading that could solidify expectations for a Federal Reserve rate cut at next week’s meeting.

At 04:10 ET (09:10 GMT), the Dollar Index — which measures the greenback against six major peers — edged down 0.1% to 98.872, putting it on track for a weekly decline of roughly 0.5% and leaving it close to its lowest level in five weeks.

PCE data set to guide market expectations

The dollar’s persistent weakness reflects growing confidence among traders that the Fed will ease policy next week, especially after a run of data pointing to softness in the labor market. But clarity has been limited due to the record-length government shutdown, which delayed the monthly jobs report that typically would have been released on Friday.

As a result, investors are turning their attention to the PCE deflator — one of the Fed’s favored inflation indicators — even though the numbers are for September and not fully current.

LSEG data indicates that markets now assign about an 86% chance of a rate cut on Wednesday, with expectations building for additional cuts next year.

Traders are also watching speculation that President Donald Trump may nominate White House economic adviser Kevin Hassett to replace Jerome Powell as Fed Chair in early 2025.

As ING noted, “For the big dollar, it remains slightly offered on the view that the Fed will cut rates next week and that the arrival of Kevin Hassett as Fed Chair will somehow make the Fed more dovish.”

Euro gains ahead of eurozone GDP release

The euro recovered further, with EUR/USD up 0.1% at 1.1654 and moving back toward Thursday’s three-week high of 1.1682.

German industrial orders unexpectedly jumped 1.5% in October, far exceeding the consensus forecast of 0.4% growth.

Later today, the eurozone will publish its final reading of third-quarter GDP, which is expected to confirm annual growth of 1.4% and a quarterly expansion of 0.2%.

ING added: “We have a slight bias that EUR/USD trades to 1.1700/1730 and continues to find support in the 1.1630/40 area.”

Sterling also firmed, with GBP/USD rising 0.1% to 1.3348 and nearing Thursday’s six-week high of 1.3385. The pound has been supported despite soft U.K. economic indicators in the aftermath of last week’s budget announcement.

Fresh Halifax housing data showed that U.K. home prices were unchanged in November after rising 0.5% in October.

According to ING, “Sterling continues to do well. We doubt this represents a major reassessment of U.K. sovereign risk, although we note that the 10-year Gilt swap spread has held onto its modest narrowing and is now at 48bp. This stood at 58bp in late September. We prefer to see the current sterling rally as a short squeeze.”

BOJ rate expectations push yen higher

In Asia, USD/JPY weakened 0.2% to 154.74 on renewed speculation that the Bank of Japan may lift interest rates at its December meeting. A report from Reuters suggested the Japanese government is increasingly open to a policy shift, while recent comments from Governor Kazuo Ueda were seen as less dovish.

USD/CNY stayed near 7.0704, while AUD/USD climbed 0.3% to 0.6634, with the Australian dollar on pace for a weekly gain of around 1.3% following data hinting at underlying economic resilience.

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