Dollar retreats after PCE data points to cooling inflation; Powell set to speak

Investing.com - The U.S. dollar retreated in early European trade Friday, as a key inflation release added to expectations that U.S. interest rates have peaked.

At 04:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 103.212, after clocking its weakest monthly performance in a year in November.

Dollar falls after PCE release

The eagerly awaited personal consumption expenditures price index rose 3% in October from a year ago, according to data released on Thursday, falling from 3.4% the previous month.

This index is widely seen as the Federal Reserve’s preferred gauge of inflation, and although the reading was still above the Fed's 2% target, the trajectory is clearly lower.

The main economic release Friday is the ISM manufacturing PMI, while traders will also pay close attention to comments from Fed Chair Jerome Powell later in the session, looking for clues of the central bank’s rate outlook.

“The FX market is set to remain highly sensitive to any activity data point, but there is a sense dollar bulls have survived the consumer spending and PCE risk, so that today’s ISM figures may not have a big impact – barring any big surprises,” said analysts at ING, in a note.

Euro helped by manufacturing PMI data

In Europe, EUR/USD rose 0.1% to 1.0897, with the euro edging higher after steep overnight losses, helped by data showing the broad-based downturn in eurozone manufacturing activity eased slightly last month, while remaining firmly in contraction territory..

HCOB's final eurozone manufacturing Purchasing Managers' Index rose to 44.2 in November from October's 43.1, above a preliminary estimate of 43.8. 

Importantly, the downturn in Germany's dominant manufacturing sector eased in November, increasing for the fourth month in a row.

GBP/USD rose 0.3% to 1.2666, heading back towards the recent three-month top of 1.2733, after data from Nationwide indicated that British house prices rose unexpectedly in monthly terms for the third time running in November.

House prices rose by 0.2% on the month in November, after a 0.9% increase in October. Compared with a year ago, house prices were 2% lower - the smallest such drop in nine months.

Yen set for another weekly gain

In Asia, USD/JPY traded 0.3% lower to 147.74, on course for its third straight week of gains against the dollar, pulling it away from the three-decade low of 151.92 it touched in the middle of November.

USD/CNY edged higher to 7.1376, after a private survey showed that Chinese manufacturing activity rebounded unexpectedly in November. But the reading contrasted with official data released on Thursday, which showed a sustained contraction in the manufacturing sector.