The euro extended its gains against the dollar on Thursday as hotter eurozone inflation reinforced expectations for a December ECB rate hike and falling US Treasury yields weighed on the greenback. Eurozone headline inflation reached a three-year high of 4.0% in October, strengthening the case for a quarter-point move from the ECB. In the US, the midterm results raised the prospect of fiscal gridlock, while hopes for an end to the Iran war pushed oil prices lower and eased inflation concerns. A December Fed hike remains on the table, but lower US yields are giving EURUSD room to rise, with France’s debt burden and political impasse still tempering demand for the euro.

Sterling is holding near 1.3490 against the dollar early Thursday, tracking the euro higher as Treasury yields ease and the greenback remains under pressure following the Democrats’ capture of both chambers of Congress. Slight downward revisions to the UK’s October services and composite PMIs did little to alter the rate outlook, leaving the Bank of England decision as the next catalyst. A quarter-point hike to 4% is largely priced in, along with another 75 basis points of tightening over the next year or so. That puts the focus on the vote split and Governor Bailey’s guidance for clues on whether the Bank is prepared to tighten as much as markets expect.

The yen is firmer against the dollar for a second straight session after minutes from the Bank of Japan’s September meeting reinforced expectations for a December rate hike. Policymakers backed further tightening, with some open to moving faster if inflation runs hotter than expected. The yen has also benefited from a decline in US Treasury yields as hopes for an easing of tensions with Iran pushed oil prices lower and took some pressure off US inflation expectations, narrowing the yield advantage of the dollar. The risk of Japanese intervention continues to discourage yen selling, though stronger-than-expected US private payrolls have kept a December Fed hike firmly in play. Friday’s US jobs report is the next test of whether Treasury yields and the dollar can regain ground.

The Australian dollar is firmer for a second straight session, helped by broad US dollar weakness and falling Treasury yields following the US midterm elections. The rebound has been tentative, with Tuesday’s dovish RBA hike tempering expectations for further tightening. The RBA raised the cash rate to 4.85% but dropped its explicit reference to possible further hikes and flagged rising unemployment risks, making a December move less likely. That leaves the Aussie’s near-term direction largely in the hands of the US dollar, with Friday’s payrolls report and Fed commentary the next tests of whether Treasury yields can extend their decline.