The Euro has come under renewed pressure amid a broader flight to safety after Iran retaliated against recent US strikes, with reports of attacks on US military bases and explosions near Bandar Abbas fueling concerns of a wider regional conflict and supporting demand for the US Dollar. The deterioration in risk sentiment has overshadowed what had otherwise been a constructive backdrop for the single currency, including improving Eurozone growth expectations and optimism around increased fiscal spending in Germany. At the same time, markets remain cautious ahead of key US PCE inflation data and Germany’s preliminary May HICP release, both of which could shape expectations for the Fed and ECB policy outlooks. ECB officials have continued to signal confidence that inflation is moving sustainably back toward target, reinforcing expectations the central bank is nearing the end of its easing cycle, though geopolitical tensions and softer global risk appetite are limiting Euro upside for now.

The Yen has remained caught between increasingly hawkish Bank of Japan expectations and still-powerful external headwinds. BoJ Governor Kazuo Ueda’s latest comments reinforced the view that policymakers are becoming more concerned that higher energy prices could feed into wages, inflation expectations, and broader price-setting behavior, keeping alive expectations for additional policy normalization in the months ahead. Recent inflation readings have continued to hold above the BoJ’s 2% target, while steady wage growth has strengthened the case for further rate hikes. However, Yen gains have been limited by Japan’s vulnerability to elevated oil prices, rising concerns about the domestic growth outlook, and persistently wide yield differentials with the United States, where Treasury yields remain comparatively attractive. On the external side, the Dollar has continued to draw support from resilient US economic data and a more hawkish repricing of Federal Reserve expectations, with markets scaling back the scope for easing amid sticky inflation and firm labor market conditions. Investors are now closely focused on upcoming Tokyo CPI data and US PCE inflation figures for further confirmation on the policy outlook for both the BoJ and the Fed, while rising geopolitical tensions and higher crude prices are also contributing to volatility.

The Australian dollar has come under renewed pressure as softer domestic data has prompted markets to scale back expectations for additional RBA tightening, particularly following weaker labor market readings and a moderation in headline inflation. While underlying price pressures remain sticky, investors increasingly believe the RBA may be nearing the end of its hiking cycle as slowing growth and easing demand begin to weigh on the economy. At the same time, heightened geopolitical tensions in the Middle East and the resulting surge in energy prices have fueled broader risk aversion and supported the US dollar and Japanese yen at the expense of higher-beta currencies like the Aussie. Concerns over slower Chinese growth – a key driver for Australia’s commodity-linked economy – have also limited AUD upside, despite some support from resilient metals demand and relatively elevated Australian yields. Meanwhile, hawkish Bank of Japan rhetoric and lingering fears of Japanese FX intervention have added further downside pressure.