The dollar held steady and the pound came under pressure, as market focus turned to U.S. PCE inflation data

The dollar held steady on Thursday, the pound weakened and consolidated, and market conditions were muted due to holiday factors. Friday will usher in the last important data of the year - US inflation data.

Sterling fell the most against the dollar in two months on Wednesday as British inflation fell below expectations to 3.9 percent in October, a two-year low.

Sterling fell 0.7 per cent to $1.2638 as traders expect the Bank of England to cut interest rates as soon as May. Sterling hit a one-week low of $1.2618 on Thursday.

The pound hit a more than three-week low against the euro at £0.8678.

Analysts predict a similar slowdown in core U.S. personal consumption expenditures (PCE) price data released on Friday, with PCE year-on-year growth expected to slow to 3.3 percent, the lowest since 2021.

But given that the dollar has been falling for several weeks and the market has digested that the Federal Reserve will cut interest rates by 150 basis points in 2024, the cautious sentiment of the market has kept the dollar from further selling for the time being.

Christopher Wong, currency strategist at OCBC in Singapore, said: "Modifying positions and reducing risk before [this] event... is a smart move."

"As the holiday season approaches, liquidity is getting lower and lower, which will exacerbate any currency volatility caused by data surprises."

The last hour of heavy selling on Wall Street also set off a wave of risk aversion in the market, even as stock futures stabilized.

In addition, Japan has raised its economic growth forecast for the current fiscal year to 1.6%, which has boosted the safe-haven yen JPY = EBS.

The yen/dollar rose about 0.2% to 143.24 yen, having earlier risen to 142.81 yen.

The yen has fallen more than 8 percent against the dollar this year as the Bank of Japan has steadfastly kept short-term interest rates in negative territory, while the U.S. has raised interest rates 300 basis points this year.

Goldman Sachs analysts said the market should watch the Bank of Japan maintain its easing bias at its recent meeting.

"Expectations for action early next year remain overly aggressive, especially given that talk of moderating inflation is already widespread," Goldman Sachs analysts said in a note.

"This is just one of the reasons why we think there is still limited scope for the yen to appreciate significantly."

The euro was steady at $1.0941 against the dollar.

The Australian and New Zealand dollars traded just below Wednesday's five-month highs. The Aussie was last at $0.6744, having touched its highest since July the day before. The New Zealand dollar was last at $0.6251.

The dollar index, down 1% so far this year, last held steady at 102.40. U.S. 10-year Treasury yields hit a seven-month low of 3.847% on Wednesday.