The euro remains broadly supported by resilient Eurozone fundamentals and the ECB’s comparatively hawkish stance, though gains against the US dollar are proving difficult to extend ahead of key US inflation data. Markets continue to weigh the prospect that the ECB will keep policy restrictive for longer than many of its global peers, offering underlying support to the single currency. However, renewed geopolitical tensions following fresh US military strikes against Iran have boosted demand for traditional safe havens, lending support to the dollar and tempering euro upside. As a result, attention is now firmly on the latest US CPI report, with a softer-than-expected inflation reading likely to weigh on the dollar by reducing expectations for further Fed tightening, while a stronger print would reinforce the case for higher US rates and could see EURUSD come back under renewed pressure.

The pound remains largely driven by external rather than domestic factors, with Sterling under pressure as a stronger US dollar benefits from safe-haven demand following the latest escalation in US-Iran tensions and renewed concerns over energy supply disruptions through the Strait of Hormuz. Higher oil prices have reinforced expectations that inflation could remain elevated, supporting a more hawkish Federal Reserve outlook and limiting upside in GBPUSD ahead of today’s key US CPI report and Fed communication. Domestically, political uncertainty has eased after Andy Burnham secured overwhelming Labour backing to become the UK’s next prime minister, although attention is already shifting toward the government’s economic agenda after business groups urged swift action to tackle the UK’s persistently high industrial energy costs, which they argue are weighing on investment. Meanwhile, the latest retail spending data painted a mixed picture, with consumer spending supported by warm weather and the World Cup but overall retail sales growth slowing from May, suggesting underlying demand remains soft despite temporary boosts. Expectations that the Bank of England will maintain a restrictive policy stance continue to provide some support for Sterling, but with UK data taking a back seat, the pound remains primarily at the mercy of US dollar dynamics and evolving global risk sentiment.

The Yen remains under pressure as the wide interest rate differential with the United States continues to favor the US Dollar, while renewed tensions between the US and Iran have pushed oil prices higher, worsening Japan’s terms of trade given its heavy reliance on imported energy. The resulting increase in safe-haven demand for the US Dollar, alongside expectations that elevated energy prices could keep global inflation sticky and reinforce the case for a more restrictive Federal Reserve, has further weighed on the Yen. At the same time, the Bank of Japan continues to normalize policy only gradually, leaving Japan’s yield disadvantage firmly intact despite ongoing official rhetoric around fiscal discipline and market stability. With USDJPY still trading near multi-decade highs, speculation over potential Japanese currency intervention remains elevated, although previous interventions have had only a temporary impact without a broader shift in monetary policy or narrowing of the US-Japan rate differential. Looking ahead, today’s US CPI report and Fed Chair Kevin Warsh’s testimony represent key catalysts, with stronger-than-expected inflation likely reinforcing the Dollar’s advantage over the Yen, while a softer outcome could encourage a modest corrective recovery in the Japanese currency.

The Australian dollar remains primarily driven by external developments, with renewed US Dollar strength and a deterioration in global risk sentiment weighing on the currency as escalating US-Iran tensions boost demand for safe-haven assets and drive oil prices higher. The renewed disruption to shipping through the Strait of Hormuz has revived inflation concerns ahead of the US CPI report, reinforcing expectations that the Federal Reserve could maintain a restrictive policy stance and underpinning the greenback. Domestically, the backdrop remains relatively supportive. The RBA continues to signal that further tightening cannot be ruled out if inflation proves persistent, while resilient labor market conditions, improving business activity and still-elevated underlying inflation argue for rates remaining restrictive. The latest NAB survey showed business confidence improving and conditions holding steady, with easing price pressures and the first decline in retail prices in seven years, although those figures largely reflected a short-lived period of lower fuel costs before the latest Middle East escalation. As oil prices climb again, those softer inflation signals are already looking dated and are unlikely to materially alter the RBA’s cautious stance. Meanwhile, China’s economy continues to stabilize rather than accelerate, offering neither a meaningful tailwind nor a significant drag for Australia. As a result, the Aussie remains largely at the mercy of US Dollar direction, global risk sentiment and geopolitical developments, with upcoming US inflation data and Fed Chair Kevin Warsh’s testimony expected to be the key near-term catalysts.