The U.S. dollar is calm on Tuesday as investors await key economic data, including Friday’s payrolls report, which could set the stage for a rate cut by the Federal Reserve later this month.

Dollar Focuses on Labor Market

The U.S. ISM manufacturing survey, due later in the session, is the first major indicator in a week full of U.S. data and is likely to show that the country’s manufacturing sector is still in contraction territory.

However, the labor market will be in the spotlight this week, as Fed policymakers seek confirmation that it is time to begin easing monetary policy, particularly after Fed Chairman Jerome Powell last month backed an imminent start to interest rate cuts due to labor market concerns.

Friday’s nonfarm payrolls release will be the key data of the week, especially since last month’s jobs report missed estimates, prompting a sharp sell-off in equity markets on fears of a recession.

Job openings will be released on Wednesday, and jobless claims on Thursday.

Markets are currently estimating about a 69% chance of a 25 basis point cut when the Fed holds its scheduled meeting on September 17-18, with a 31% chance of a 50 basis point cut, as indicated by CME’s FedWatch tool.

Euro Nears Two-Week Lows

In Europe, EUR/USD was down about 0.1% to 1.1061, not far from the two-week low of 1.1042 it touched last session, after data indicated that Eurozone manufacturing activity remained in the contraction zone during August.

The European Central Bank cut interest rates in June and looks likely to do so again later this year, especially after Eurozone inflation fell to 2.2% in August, the lowest level in more than three years.

Traders are also paying attention to the uncertain political situation in Germany, after Alternative for Germany became the first far-right party to win a state legislative election in Germany since World War II.

GBP/USD lost about 0.2% to 1.3129, with the UK calendar very quiet this week.

Sterling had a strong August and has gained nearly 2% over the past month, supported by estimates that the Bank of England will keep interest rates high for much longer than in the U.S. and Eurozone.

The Yen Rebounds

Turning to Asia, the USD/JPY fell 0.6% to 146.03, retreating from a two-week high of 147.16 reached on Monday after data showed that Japanese factory activity contracted again in August, according to a private sector survey.

USD/CNY traded flat at 7.1161, while AUD/USD was down 0.6% at 0.6750 ahead of the Australian gross domestic product report due on Wednesday.