The euro is holding firmer as reduced expectations for an October Fed rate hike take some pressure off the dollar, although the broader fundamental backdrop remains mixed. Persistent eurozone inflation and a firmer growth outlook support expectations for further ECB tightening, helping limit the drag from interest rate differentials. However, concerns over France’s ability to contain its budget deficit, alongside a widening French borrowing premium over Germany, continue to weigh on confidence in the single currency. Stronger US growth and Fed signals that further hikes remain necessary also constrain the euro’s upside, even if the pace of tightening becomes more gradual. Friday’s US consumer sentiment and inflation expectations readings are the next focus for assessing whether the dollar’s softer tone can persist.

Sterling is recovering modestly as softer US rate expectations weigh on the dollar, with Fed Governor Waller signaling flexibility over the pace of further tightening and leaving room for an October pause. However, the pound’s domestic backdrop remains challenging, with elevated long-term borrowing costs and renewed concerns over the UK’s fiscal position keeping attention on the forthcoming Budget. Uncertainty over potential tax increases and the government’s ability to manage fiscal pressures could limit sterling’s recovery. Meanwhile, Musalem’s call for further Fed tightening underscores that a pause would not necessarily signal an end to rate increases, leaving the dollar sensitive to today’s US consumer sentiment and inflation expectations readings.

The yen is caught between weak domestic consumption and expectations for further Bank of Japan tightening, with a softer dollar and lower US Treasury yields offering some support. Japan’s household spending fell for a ninth consecutive month in August, although the smaller-than-expected decline and an eighth straight increase in real wages suggest the foundations for further rate increases remain intact. The BoJ’s September hike came with less hawkish guidance than markets had hoped, but gradual tightening is still reducing the yen’s appeal as a funding currency, while the threat of intervention is discouraging aggressive selling. Lower oil prices also offer relief for Japan’s energy import bill, though expectations for another Fed hike in December and lingering US-Iran tensions continue to favor the dollar. Attention now turns to US consumer sentiment, inflation expectations and Fed commentary for the next shift in interest rate expectations.

The Australian dollar is finding modest support from a softer US dollar and lower Treasury yields, with strong demand at the US 30-year bond auction helping ease yields and reduced expectations of immediate US military action against Iran tempering oil prices and inflation concerns. However, the recovery remains fragile as fading expectations for another RBA rate hike limit support from Australian interest rates, while the Fed’s hawkish stance continues to underpin the greenback. Persistent Middle East tensions also leave the risk-sensitive Aussie vulnerable to renewed demand for safe havens, keeping the balance between US yield relief and geopolitical uncertainty central to its near-term outlook.