The euro is holding onto its recovery against the dollar, supported by firmer expectations for an October Fed pause after Chair Warsh avoided signalling an immediate need for further tightening. However, expectations for a December hike remain elevated, limiting the scope for a broader retreat in US rate expectations. France remains the main domestic headwind, with violent protests, partial curfews and widening French government bond spreads highlighting concerns over political stability and the fiscal outlook. Geopolitical uncertainty surrounding Ukraine is also weighing on sentiment, leaving the euro resilient against the dollar but lagging some of its peers. Attention now turns to Germany’s ZEW survey and US employment indicators for fresh direction.

The pound is drawing support from diverging near-term policy expectations, with markets anticipating an October pause from the Federal Reserve while pricing in further Bank of England tightening, potentially beginning in November. This relative interest rate outlook has helped sterling firm against a softer dollar, although expectations for a later Fed hike temper the advantage. Attention is also turning to next week’s UK budget, where credible restraint on spending and borrowing could strengthen demand for gilts and reinforce confidence in UK assets. The budget remains a key test for sterling, with further support dependent on the government delivering the fiscal discipline investors increasingly expect.

The yen remains caught between growing confidence in further Bank of Japan policy normalization and the continued appeal of elevated US yields. Governor Ueda’s assessment that underlying inflation is approaching the central bank’s target, supported by a strengthening wages–prices cycle, keeps additional tightening on the table, though expectations for a gradual approach have limited support for the currency. Meanwhile, increased confidence in a Federal Reserve pause this month has been offset by expectations for a subsequent US rate hike, leaving interest rate differentials a persistent headwind for the yen. Prime Minister Takaichi’s assurances over fiscal discipline provide some reassurance, but attention now turns to Friday’s Japanese inflation report for evidence that could bring forward expectations for the BoJ’s next move.

The Australian dollar is consolidating after its recent recovery, with China’s decision to leave lending rates unchanged offering little fresh support for the China-sensitive currency. Domestically, RBA Assistant Governor Christopher Kent’s comments that rising neutral rates could leave policy less restrictive than assumed have kept the possibility of further tightening alive, providing some underlying support for the Aussie. Meanwhile, reduced expectations for an immediate Fed hike have softened the US dollar, although persistent expectations of tightening later in the year continue to limit the scope for further Australian dollar gains. Attention now turns to RBA Deputy Governor Andrew Hauser’s upcoming remarks for further guidance on the domestic policy outlook.