A look at the day ahead in European and global markets from Rae Wee

Asian shares climbed to their highest in more than three years on Friday and Europe looked set to join the rally, as markets turned optimistic after weathering a few weeks of heightened Middle East tensions and uncertainties over tariffs.

Wall Street set the pace overnight when investors latched onto the latest upbeat developments: The fragile ceasefire between Israel and Iran continued to hold, and China-U.S. trade tensions showed tentative signs of further easing.

Expectations were also rising for more rate cuts by the Fed, with the prospect of a more dovish Fed chair on the horizon and continued weak U.S. economic data.

On the trade front, a White House official said on Thursday the United States had reached an agreement with China on how to expedite rare earths shipments to the U.S.

Adding to tailwinds for investors, U.S. Treasury Secretary Scott Bessent asked Republicans in Congress to remove from their sweeping budget legislation a "retaliatory tax" proposal that targets foreign investors.

The next key for markets on Friday will be the release of the core PCE price index in the U.S., which could offer additional clues on the Federal Reserve's rate trajectory.

There have been few signs thus far that President Donald Trump's tariffs are causing the huge spike in domestic consumer prices that many investors had feared, although Fed officials have said it is still too early to tell.

Any downside surprise in Friday's PCE numbers could fuel bets on more easing by the Fed this year.

The Fed's rate outlook and Chair Jerome Powell's future at the central bank have been front and centre for markets over the past two sessions, after the Wall Street Journal reported that Trump has toyed with the idea of announcing Powell's replacement by September or October.

That would leave Powell with a "shadow" looming over him for the last six meetings of his tenure.

These developments have triggered a wave of heavy dollar selling as investors fret about the Fed's independence and bet that Powell will be replaced by somebody more inclined towards rate cuts.

The dollar languished near a 3-1/2-year low on Friday and was set for its worst week in more than a month.

The dollar is already down more than 10% for the year thus far and, if the latest losses hold until the end of the month, it will mark its biggest fall for the first half of the year since the start of the era of free-floating currencies in the early 1970s.

Key developments that could influence markets on Friday: