The euro is holding modest gains against the dollar, but the fundamental backdrop remains challenging as hawkish Fed commentary and elevated US Treasury yields support demand for the greenback. Cleveland Fed President Beth Hammack’s warning that tighter policy may be needed to prevent inflation expectations becoming entrenched reinforces that headwind, with this week’s US inflation and retail sales releases set to shape the next move in rate expectations. On the European side, France’s budget standoff and doubts over the government’s ability to secure parliamentary backing for proposed savings are keeping fiscal and political risks in focus. Overall, the euro’s recovery remains vulnerable, with a more sustained improvement likely to require softer US data and some easing of French fiscal uncertainty.

The pound is finding some support from stronger-than-expected BRC retail sales and hawkish comments from Bank of England policymaker Megan Greene, whose concerns about second-round inflation effects reinforce expectations that monetary policy will remain restrictive. Sterling is also benefiting from modest dollar profit-taking following the US currency’s recent advance. However, expectations of another Federal Reserve rate hike before year-end, alongside energy-related inflation risks and elevated US yields, continue to constrain the recovery. Persistent tensions involving Iran and renewed fighting in Yemen are also underpinning safe-haven dollar demand, leaving the pound’s near-term outlook dependent on upcoming UK growth figures, US inflation data and central bank guidance.

The yen is drawing support from caution over possible Japanese currency intervention and a modest pullback in the dollar, despite softer domestic wholesale inflation. The latest price data leave further Bank of Japan tightening on the table, but the easing in inflation pressure strengthens the case for an October pause and potentially delays the next hike until December. Elevated oil prices linked to Middle East tensions complicate that outlook by threatening renewed inflation while weighing on Japan’s energy import bill. Meanwhile, hawkish comments from the Fed’s Beth Hammack reinforce the prospect of restrictive US policy, limiting the yen’s recovery, with upcoming US inflation and retail sales reports set to shape interest rate expectations and the pair’s next direction.

The Australian dollar is holding steady as the latest RBA minutes balance renewed upside inflation risks against signs of tighter domestic conditions. Policymakers flagged pressure from AI-related demand and higher oil prices, keeping a cautious stance on further easing, while weaker house prices and uncertainty around employment data complicate the assessment of how restrictive policy actually is. Externally, escalating Middle East tensions are weighing on risk appetite and supporting safe-haven dollar demand, limiting the Aussie’s upside. Attention now turns to US inflation data and Fed commentary, with softer readings potentially offering relief through reduced US rate expectations, while persistent price pressures would reinforce the dollar’s yield support.