The euro slipped against the dollar early Thursday, extending it run of fresh yearly lows, as a hotter-than-expected U.S. inflation report raised the odds of a larger Fed rate hike in December. Fed Governor Christopher Waller said he favors a quarter-point increase and could back a half-point move if inflation comes in hotter than expected. A December ECB hike also remains in play, though concerns about eurozone growth could limit the scope for further tightening. ECB Chief Economist Philip Lane said the policy outlook hinges on how much the earlier surge in energy costs feeds through to wages and broader prices, even as energy prices ease. Friday’s U.S. producer price report is the next test of whether markets have room to price in a more aggressive Fed move.

Sterling fell to a four-week low against the dollar as hotter-than-expected US inflation and hawkish Fed commentary continue to weigh and lead markets to price in a greater chance of a 50-basis-point rate hike in December. Renewed demand for the dollar as a safe haven amid Middle East tensions added to the pressure on GBPUSD. The Bank of England’s hawkish stance has offered sterling some support, with the monthly and quarterly UK GDP releases now in focus for what they could mean for the UK rate outlook.

The yen outperformed is holding up slightly better than its major peers in the new day after stronger-than-expected Japanese producer inflation reinforced expectations for further Bank of Japan rate hikes. Producer prices rose 0.7% in October, more than double the 0.3% consensus, while annual growth accelerated to 7.1% from 6.8%. The data has helped pull USDJPY back into the mid-159 range, though the pair has held close to its recent highs as the US dollar draws support from hawkish Fed commentary. Markets have fully priced in a December Fed hike, and Governor Christopher Waller has raised the possibility of a 50-basis-point move, limiting the yen’s gains against the dollar.

The Australian dollar fell for a third straight session, with AUDUSD trading near a 10-month low as hotter-than-expected US inflation and hawkish Fed commentary lifted the US dollar. Fed Governor Christopher Waller signaled support for a quarter-point hike in December and left the door open to a half-point move if inflation worsens. In Australia, consumer inflation expectations held at 5.3% in November, the highest since June, while September headline inflation accelerated to 4.3%, well above the RBA’s 2–3% target. Even with those price pressures, markets increasingly expect the RBA to hold rates steady, leaving the Australian dollar under pressure as traders price in further US tightening.