The Federal Reserve’s decision to maintain high interest rates at 4.5%, the highest among G10 central banks, reflects a cautious “wait and see” approach, potentially pressuring the EURUSD exchange rate in the near term. The euro area economy grew slightly by 0.1% in Q2, avoiding stagnation but showing weaknesses in Germany and Italy, partly due to uncertainties from new U.S. tariffs impacting trade. Despite these challenges, Pimco analysts predict the euro may strengthen against a weakening dollar as global portfolios diversify, with U.S. trade policies possibly reducing demand for U.S. assets. German inflation dipping below the ECB’s 2% target and a resilient labor market further support expectations of controlled inflation in the eurozone.

The Bank of Japan maintained its interest rate at 0.5% and raised its inflation forecasts for 2025–2027, citing higher food prices, while slightly increasing its 2025 growth projection. Governor Ueda downplayed the likelihood of an imminent rate hike, emphasizing uncertainties like U.S. tariffs and global trade, leading markets to reduce expectations for near-term policy tightening. The dovish stance, combined with wide rate differentials with the U.S. Federal Reserve, strengthened USDJPY, with potential for further yen weakness amid political challenges and limited expectations of intervention by Japan’s Ministry of Finance.

Australia’s Q2 CPI rose slightly below expectations at 0.7% quarterly and 2.1% annually, supporting a likely 25bps rate cut by the RBA in August. The trimmed mean CPI of 2.7% aligned with RBA forecasts, indicating contained inflation. Despite a rise in unemployment to 4.3%, the RBA views it as near full employment. Strong retail sales (1.2% MoM) and building approvals (11.9% MoM) suggest robust consumer spending and a potential housing sector recovery, though sustained growth remains uncertain. Markets anticipate at least two rate cuts in 2025, but strong economic data could prompt the RBA to pause.