The euro has come under pressure below 1.1600, with the dollar benefiting as hotter underlying US inflation and firm producer prices pushed markets toward expecting another Federal Reserve rate hike this week. The ECB’s recent quarter-point increase and broadly hawkish messaging have kept expectations for further European tightening elevated, particularly after updated forecasts showed inflation remaining above target for longer. However, that support has been overshadowed by the more immediate repricing of Fed policy, leaving relative rate expectations tilted in favor of the dollar ahead of Wednesday’s decision.

The pound has been consolidating above 1.3500 against the dollar, supported by stronger-than-expected UK growth in July and lingering expectations that elevated energy costs could eventually require tighter Bank of England policy. However, Governor Bailey has pushed back against the idea that rate hikes are inevitable, while the BoE is widely expected to leave rates unchanged this week. This has limited sterling demand ahead of Tuesday’s UK employment report and Wednesday’s inflation data, which will shape the outlook for domestic policy. On the other side of the pair, rising expectations for a Federal Reserve rate hike and escalating Middle East tensions have supported the safe-haven dollar, leaving GBPUSD caught between resilient UK fundamentals and a firmer US currency.

The yen has edged lower against the dollar at the start of the week as firmer expectations for a Federal Reserve rate hike and escalating Middle East tensions support the greenback through higher US yields and safe-haven demand. Still, the Japanese currency remains close to a seven-month high, underpinned by a sharp hawkish repricing of the Bank of Japan outlook. Markets broadly expect the BoJ to raise rates later this week and will be focused on whether officials signal a faster pace of tightening, potentially including another move in December, as underlying inflation approaches target and policy remains below neutral. With both central-bank decisions approaching, USDJPY remains caught between near-term dollar strength and the prospect of a further narrowing in US-Japan rate differentials.

The Australian dollar has started the week on the defensive as rising expectations for a Federal Reserve rate hike, elevated US yields and renewed Middle East tensions support the US dollar and weigh on risk-sensitive currencies. Higher oil prices are also unsettling global markets, although the Aussie’s losses have been limited by increasingly hawkish RBA expectations after recent Australian inflation data showed persistent underlying price pressures. The prospect that higher fuel costs could keep domestic inflation elevated has reinforced the case for further RBA tightening, providing an important counterweight to softer consumer sentiment and broader risk aversion. Near-term direction will largely hinge on the Fed decision and upcoming Australian employment data, with the policy outlook on both sides of the pair remaining the dominant driver.