The euro has been underpinned by increasingly hawkish ECB expectations, with Isabel Schnabel warning that inflation is likely to remain above the 2% target for an extended period and stressing the need to prevent energy-driven price pressures from generating second-round effects. Her comments reinforce expectations that the ECB will raise rates again in September, particularly as the eurozone economy continues to show resilience despite elevated energy costs. Nevertheless, the single currency has struggled to extend its gains, with EURUSD slipping as the dollar firms ahead of today’s US PCE inflation report. The near-term direction will therefore depend heavily on whether the US data strengthens expectations for further Fed tightening, while falling German and US bond yields and uncertainty over how far the ECB will tighten beyond September are also limiting conviction.

Sterling remains close to a six-month high against the dollar, supported by a combination of resilient UK activity, sticky inflation and growing expectations that the Bank of England could raise rates again before year-end. Recent PMI and confidence data have pointed to improving economic momentum, while July inflation accelerated to 2.9% and the latest Citi/YouGov survey showed a renewed rise in public inflation expectations, reinforcing the market’s relatively hawkish BoE pricing. GBPUSD has nevertheless edged back below the mid-1.3600s as traders reduce exposure ahead of the US PCE report and Fed Chair Warsh’s Jackson Hole address. Softer US yields, reduced expectations of further Fed tightening and hopes for Iran diplomacy continue to limit the dollar’s recovery, although elevated gilt yields and uncertainty surrounding the UK’s October budget remain important domestic constraints on further sterling gains.

The yen remains caught between increasingly supportive domestic inflation signals and the still-wide US-Japan interest-rate differential. Economy Minister Minoru Kiuchi said consumer prices should continue to rise gradually because of the Middle East situation, while Japanese corporate-services inflation accelerated to 3.6% year-on-year in July, reinforcing expectations that the Bank of Japan could raise rates again as soon as September. Higher Japanese yields and the continuing threat of official intervention are helping to limit further yen weakness, but elevated US yields, concerns over Japan’s fiscal outlook and doubts that modest BoJ tightening will rapidly close the rate gap continue to constrain any sustained recovery. Easing Middle East tensions and lower oil prices offer some relief for energy-importing Japan, leaving the yen’s near-term direction particularly sensitive to US inflation data and the resulting shift in Fed expectations.

The Australian dollar has outperformed after hotter-than-expected July inflation reinforced expectations that the RBA may need to tighten policy again. Headline CPI rose 1.0% on the month and 3.5% year-on-year, while the more policy-relevant trimmed mean held at an elevated 3.6%, highlighting persistent underlying price pressures despite the moderation in annual headline inflation from 3.8%. This strengthens the message from the RBA’s latest meeting, where policymakers kept the cash rate at 4.35% but explicitly retained the option of another increase if upside inflation risks materialize, including those stemming from energy prices, resilient demand and domestic capacity pressures. The resulting hawkish repricing has lifted Australian yields and supported the AUD, particularly against the softer New Zealand dollar, although the next move against the US dollar will also depend heavily on the upcoming US PCE inflation report and its implications for Fed policy.