The euro remains well supported by increasingly hawkish ECB expectations, with markets pricing a strong chance of another rate increase in September and further tightening by year-end. ECB officials, including Schnabel, have highlighted upside inflation risks from the prolonged Middle East conflict and the surprising resilience of the eurozone economy, reinforcing the view that borrowing costs may need to rise further. This policy backdrop has helped EURUSD hold up, although gains have been kept in check by consolidation following the recent rally and uncertainty surrounding the US rate outlook. Attention now shifts to Fed Chair Warsh’s Jackson Hole speech, particularly after US inflation data offered little clarity, with core PCE matching expectations but headline inflation coming in slightly hotter.

Sterling remains well supported near six-month highs, underpinned by resilient UK data, elevated gilt yields and lingering Bank of England tightening risk after July inflation rose to 2.9% and three MPC members voted for a rate hike. However, the pound’s broader August advance has also owed heavily to US dollar weakness, leaving it vulnerable when US data or Fed expectations support the greenback, as seen following Wednesday’s slightly firmer headline PCE reading. With no major UK releases left this week, domestic policy expectations are unlikely to shift meaningfully, while concerns over high borrowing costs and limited fiscal headroom remain a background restraint. Near-term direction should therefore be driven primarily by the dollar and Fed Chair Warsh’s Jackson Hole address on Friday, with markets looking for clarity on how the Fed will respond to still-elevated inflation.

Yen declines have stalled out as optimism around a potential US-Iran ceasefire and the reopening of commercial shipping routes through the Strait of Hormuz has eased geopolitical concerns and restrained the dollar. Still, yen gains remain limited by Japan’s deteriorating fiscal outlook and the wide US-Japan interest-rate differential, particularly as sticky US inflation keeps the possibility of further Fed tightening alive. Markets are now looking to Friday’s Tokyo CPI report for clues on the pace of future Bank of Japan rate hikes, while Fed Chair Warsh’s Jackson Hole speech will be critical in shaping the US rate outlook and the next move in USDJPY.

The Australian dollar remains well supported by a sharp repricing of RBA policy expectations after hotter-than-expected July inflation reinforced concerns that price pressures are proving persistent. Major Australian banks now expect the cash rate to rise to 4.60%. The currency has largely shrugged off a steep decline in second-quarter private capital expenditure, with broader indicators continuing to suggest an economy that is soft rather than seriously weak. Still, the upside has been limited by a firm US dollar following slightly hotter headline PCE inflation, while traders await further policy direction from Fed Chair Warsh at Jackson Hole.