The euro has held up above 1.1200 following its recovery, showing resilience despite hotter US inflation readings and renewed expectations for further Fed tightening. The dollar’s inability to sustain its initial post-inflation gains, alongside the subsequent decline in US Treasury yields, suggests considerable hawkishness may already be priced in, offering the single currency some support. France’s fiscal challenges and ongoing Middle East tensions remain headwinds, but these concerns have so far failed to undermine the recovery. Attention now turns to Fed Chair Warsh’s remarks for guidance on the policy outlook, with the euro’s resilience suggesting further upside is possible if his comments fail to materially strengthen the case for higher US rates.

Sterling is balancing persistent UK inflation concerns against a cautious Bank of England outlook, with Governor Bailey describing above-target inflation as “enormously frustrating” while stressing it is too early to draw firm conclusions about broader wage and price pressures. His observation that second-round effects remain subdued, with businesses focused on cutting costs, tempers expectations for aggressive tightening and limits the pound’s interest rate support. Bailey’s assessment that the economy has proved more resilient than expected offers some encouragement, although his acknowledgment that growth remains insufficient highlights the difficult policy trade-off between containing inflation and supporting activity.

The yen is under renewed pressure as hotter-than-expected US producer prices reinforce the message from the latest CPI report, strengthening expectations for further Fed tightening and supporting the dollar ahead of Kevin Warsh’s speech. However, hawkish signals from the Bank of Japan are providing some underlying support, with board member Koeda warning against excessive caution on rate hikes and highlighting upside inflation risks and scope for further policy normalization. The balance between US inflation concerns and expectations for additional Japanese tightening remains the key driver, while weaker risk appetite could offer the yen intermittent support.

The Australian dollar remains under pressure as a sharp deterioration in domestic employment conditions prompts markets to scale back expectations for further RBA rate hikes. September’s unexpected fall in employment and rise in unemployment have weakened the currency’s interest rate support, leaving its recovery vulnerable to renewed US dollar demand. Stabilizing US Treasury yields, expectations for another Fed hike and persistent Middle East tensions are also weighing on sentiment towards the risk-sensitive Aussie. Attention now turns to Fed Chair Warsh’s remarks for guidance on the policy outlook, with a hawkish message potentially reinforcing pressure, while a more measured tone could offer some relief.