The euro remains well supported near multi-month highs against the dollar, driven by broad USD weakness and growing expectations that the ECB may need to tighten policy further. Euro-area inflation rose to 2.9% in July, with energy prices increasing 10.3% year-on-year, reinforcing concerns that elevated oil and gas costs could keep price pressures above the ECB’s target and prompting markets to price a more hawkish policy path. The currency has also benefited from a modest improvement in the regional economy, including 0.4% second-quarter growth, although weak retail activity and renewed energy-supply risks remain headwinds. EURUSD’s advance has stalled around 1.1700 as hawkish Fed minutes, elevated US yields and geopolitical tensions provide the dollar with some support, leaving the upcoming Eurozone and US flash PMIs as the next important test of the relative growth and rate outlooks.

The pound remains well supported near six-month highs against the US dollar. Sterling’s advance has been driven primarily by broad dollar weakness following the US Treasury’s expansion of long-dated bond buybacks, which has raised concerns about US fiscal credibility and pushed investors away from the greenback. Domestically, persistent UK inflation has reinforced expectations that the Bank of England may need to raise rates again, providing an additional tailwind for sterling despite signs of cooling employment and wage growth. July retail sales fell 0.5% month-on-month, while the annual increase of 1.6% undershot expectations, but the figures were not weak enough to materially alter the BoE outlook. Larger-than-expected public borrowing also highlighted ongoing fiscal concerns, leaving the pound’s strength largely dependent on favorable rate expectations and continued pressure on the dollar.

The yen has been trading in a narrow range against the dollar, supported by expectations that the Bank of Japan will continue gradually tightening policy but restrained by Japan’s still-wide interest-rate disadvantage and rising import costs. Japan’s core national CPI accelerated to 1.8% year-over-year in July from 1.6%, matching expectations and reinforcing the case for further BoJ normalization, although inflation remains below the central bank’s 2% target. At the same time, Japan’s widening trade deficit and elevated energy costs have limited the currency’s recovery. On the US side, Treasury plans to expand long-dated bond buybacks have lowered yields and weakened the dollar, easing pressure on the yen and pulling USDJPY slightly away from the psychologically important 160 level.

The Australian dollar has regained ground above 0.7100, but the advance has been driven primarily by broad US-dollar weakness rather than improving domestic fundamentals. Concerns about the US fiscal outlook and skepticism that the Treasury’s expanded long-dated bond-buyback program will provide more than temporary relief have weighed on the greenback and supported AUDUSD. However, the Aussie’s upside has been tempered by a clear softening in Australia’s labor market: employment unexpectedly fell by 15,800 in July, while unemployment rose from 4.4% to 4.5%, strengthening the argument for the RBA to pause rather than raise rates again in September. The RBA still considers the labor market somewhat tight and remains alert to persistent inflation, but the latest employment figures have reduced the urgency for further tightening, leaving the currency caught between supportive external US-dollar dynamics and a less favorable domestic rate outlook.