The euro has extended its advance to a two-month high near 1.1600, supported primarily by broad US dollar weakness as softer US data continues to reduce expectations for another near-term Federal Reserve rate hike. July retail sales fell 0.6%, while recent inflation and labor-market readings have also pointed to a cooling US economy, lowering the implied probability of a September Fed hike to around 30%. By contrast, euro-area inflation remains elevated at 2.9%, reinforcing expectations that the ECB could deliver one final 25-basis-point increase in September after holding rates steady in July. This divergence in policy expectations remains supportive, although geopolitical tensions, volatile oil prices and associated inflation risks could underpin the dollar and limit the euro’s upside. Attention now turns to Wednesday’s FOMC minutes for further guidance on the Fed’s policy outlook.

The pound has strengthened above 1.3550 against the dollar, supported by a favorable shift in relative rate expectations. Softer US retail sales, subdued inflation and recent labor-market weakness have reduced the perceived risk of a Federal Reserve rate hike in September, weighing on the dollar. Sterling is also drawing support from a persistently hawkish Bank of England, with Chief Economist Pill arguing that resilient UK growth reinforces the case for higher borrowing costs. The economy expanded by 0.4% in the second quarter, led by services, easing fears of a sharp downturn and giving the BoE greater scope to focus on persistent inflation pressures. Attention now turns to this week’s UK employment and inflation reports, which will determine whether markets strengthen expectations for additional BoE tightening.

The yen has edged higher against the US dollar, with USDJPY slipping below 159.00 as softer US data has reduced expectations for another Federal Reserve rate hike and weighed on the broader dollar. However, the yen’s gains remain limited after Japan’s economy expanded by a weaker-than-expected annualized 1.1% in the second quarter, with subdued household consumption and a 1.2% decline in business investment complicating the Bank of Japan’s path toward further tightening. At the same time, elevated inflation risks, rising Japanese government bond yields and continued concern over excessive yen weakness are keeping expectations of another BoJ rate hike alive, while the threat of renewed currency intervention provides an additional layer of support near the 160.00 area. For now, the yen remains caught between a narrowing US-Japan policy gap and doubts over whether Japan’s fragile domestic economy can withstand faster monetary tightening.

The Australian dollar has extended its recovery through 0.7100, supported by a widening divergence in central-bank expectations. The RBA retained a hawkish bias at its latest meeting, with Governor Bullock keeping the option of further tightening firmly open if inflation fails to moderate, while some analysts continue to anticipate one more rate increase later this year. In contrast, weaker US inflation data and July’s unexpected 0.6% decline in retail sales have reduced expectations for a September Fed hike and weighed on the US dollar. Improved risk sentiment and gains in Chinese equities have provided an additional tailwind for the growth-sensitive Aussie, although uncertainty surrounding China’s economic outlook and elevated geopolitical risks may limit further upside.