The euro is holding broadly steady after the ECB delivered a widely expected quarter-point rate hike and maintained a hawkish bias, warning that the Middle East-driven energy shock will keep inflation above target for an extended period. The ECB also raised its growth forecasts, highlighting the euro-area economy’s resilience, while upward revisions to the inflation outlook reinforced expectations that further tightening may be required. However, the currency has received only limited support because stronger US producer inflation has increased expectations for a Federal Reserve rate hike, supporting the dollar ahead of today’s critical US CPI release. A softer inflation print would likely favor the euro by tempering Fed tightening bets, while another upside surprise could strengthen the dollar and keep EURUSD under pressure.

The pound is holding broadly steady around 1.3500 against the dollar, caught between expectations of further Bank of England tightening and renewed support for the greenback from firm US inflation data. Rising energy costs and persistent UK inflation have encouraged markets to price another BoE rate increase before year-end, although Governor Andrew Bailey has pushed back against the idea that tightening is inevitable, stressing that policy will depend on incoming economic data and geopolitical developments. Attention now turns to US CPI, which could strengthen the dollar if inflation surprises higher, while upcoming UK growth, employment and inflation figures will shape expectations ahead of next week’s BoE decision, where a hawkish hold is widely anticipated. Elevated gilt yields and uncertainty surrounding the government’s October budget remain potential constraints on sterling, but the broader trend in sentiment toward the currency remains constructive.

The yen is remains well supported on dips on the back of a sharp hawkish repricing of Bank of Japan policy expectations. Japanese producer inflation remained elevated in August, reinforcing evidence of persistent domestic price pressures and strengthening the case for further tightening. Recent comments from BoJ officials have added to expectations for a rate hike at next week’s meeting, with markets also seeing a strong possibility of another move before year-end. However, yen gains remain constrained by resilient US inflation and growing expectations for a Federal Reserve rate hike, which continue to support the dollar and keep US-Japan rate differentials wide. Attention now turns to the US CPI report, which will determine whether USDJPY extends its recovery or renewed BoJ-driven yen demand takes control.

The Australian dollar has softened, pressured mainly by renewed US dollar strength after hotter US producer-price inflation increased expectations for a Federal Reserve rate hike in September. Attention now turns to the US CPI report, which will be the final major inflation reading before next week’s Fed decision and could determine whether the US dollar extends its advance. Domestic policy expectations remain supportive for the Aussie, however, with RBA officials Sarah Hunter and Andrew Hauser warning that persistent inflation could require additional tightening. Markets are consequently assigning a high probability to an RBA rate increase this month, helping to limit the currency’s downside despite the stronger US dollar backdrop.