The euro has remained well-supported above 1.16, driven primarily by a more hawkish shift in ECB expectations as policymakers grow increasingly concerned that the inflationary impact of elevated energy prices linked to Middle East tensions is broadening beyond the energy sector. ECB Executive Board member Isabel Schnabel has argued that the central bank can no longer look through the inflation shock, warning of rising risks of second-round effects and unanchored inflation expectations, prompting markets to price in additional rate hikes this year. Attention is now firmly on the latest Eurozone HICP release, with headline inflation expected to accelerate further after rising to 3.0% in April, reinforcing the view that price pressures remain well above the ECB’s 2% target. Recent national inflation readings from major economies including Spain and France have also surprised on the upside, adding to expectations that the ECB will maintain a tightening bias. At the same time, ongoing geopolitical uncertainty surrounding the Israel-Iran conflict, risks to global energy supply routes, and developments around the Strait of Hormuz continue to fuel concerns over persistent inflation pressures, helping underpin the euro even as broader risk sentiment remains fragile.

The yen remains under pressure as markets continue to focus on the wide policy divergence between the Federal Reserve and Bank of Japan, with USDJPY pushing back toward the 160 level despite growing expectations for a BoJ rate hike at the June 15-16 meeting. While BoJ Governor Ueda has maintained a hawkish tone, warning about second-round inflation effects from higher energy prices, and market participants increasingly expect another rate increase alongside further policy normalization, these supportive factors for the yen have been offset by rising concerns over Japan’s vulnerability to elevated oil prices amid ongoing Middle East tensions. Higher energy costs are seen as a drag on Japan’s import-dependent economy even as they boost inflation. At the same time, resilient US economic data and persistent inflation concerns have reinforced expectations that US rates will remain higher for longer, sustaining favorable yield differentials for the dollar. Japanese authorities have also stepped up verbal intervention, with Finance Minister Katayama stressing close monitoring of markets and coordination with US counterparts, helping to curb speculative yen selling as traders remain wary of potential intervention should USDJPY extend gains beyond current levels. Meanwhile, rising Japanese government bond yields, with 10-year JGB yields at multi-decade highs, have fueled debate over the pace of BoJ normalization, with major financial institutions arguing that a clear roadmap for future tightening will be just as important as the June rate decision in restoring confidence in the yen.

The Australian Dollar has come under modest pressure in recent sessions as investors reassess the domestic growth outlook ahead of Wednesday’s Q1 GDP release. A weaker-than-expected current account report, which showed the deficit widening to A$27.1 billion, alongside softer company profit data, reinforced concerns that growth momentum is slowing, with net exports now expected to subtract around 0.8 percentage points from quarterly GDP and government spending contributing little support. At the same time, signs of cooling domestic demand, including softer household consumption, a gradually weakening labor market and flat housing prices, suggest the Reserve Bank of Australia’s earlier tightening is beginning to bite. However, AUD downside remains tempered by the RBA’s still-hawkish policy stance, with sticky underlying inflation, rising wage pressures following Australia’s 4.75% minimum wage increase, and expectations from some banks for a further 25bp rate hike in August helping to support yield differentials. More broadly, the currency continues to take direction from global risk sentiment, developments in the Middle East and China’s economic performance, with China acting more as a stabilizing influence than a major growth tailwind for Australia. Overall, while softer near-term growth expectations have weighed on the AUD, the prospect of higher-for-longer Australian interest rates continues to provide an important fundamental offset.