The euro is modestly firmer, retracing Tuesday’s dip while holding most of the sharp rebound from the 1.1766 area, though it has eased slightly after pushing back above 1.19. Recent European Central Bank commentary has played down the euro’s rise as manageable and already factored into baseline forecasts, with inflation near target and little urgency to push back against currency strength. While some officials flag a stronger euro, Chinese imports, and US tariffs as downside risks that could keep inflation undershooting, others warn trade fragmentation may prove inflationary over time—leaving risks finely balanced. Meanwhile, elevated speculative long EUR positioning suggests the currency could be vulnerable to pullbacks if data or ECB messaging disappoints.

The yen has strengthened modestly as softer US data and a weaker dollar allow it to pull back from recent extremes, while optimism around PM Takaichi’s post-election agenda has raised hopes for more durable growth and gradual BOJ normalization. Near term, the yen is still expected to trade with a soft bias rather than slide sharply, despite foreign inflows into Japanese equities that may actually weigh on the currency due to hedging. Further out, however, tighter fiscal discipline, a more constructive JGB backdrop, and a cautious BOJ could help the yen move away from its weakest levels, especially as risks grow around an overcrowded yen carry trade that could unwind if volatility rises. Recent data add nuance: Japan’s January machine tool orders surged on strong overseas demand, highlighting solid global momentum but still-weak domestic activity.

The Australian dollar outperformed in Asia, rising about 0.7% to just below a three-year high after RBA Deputy Governor Hauser signaled lingering inflation risks and a still-restrictive policy stance, reinforced by firm housing credit growth. While borrowing remains resilient, softer consumer and business surveys—alongside a December pullback in household spending—point to easing momentum and growing cost-of-living strain. Markets continue to price a year-end cash rate near 4.25%, but expectations are shifting toward a more gradual RBA path if inflation cools further. Positioning shows increased optimism for AUD on yield support, though the currency remains highly sensitive to upcoming inflation, labor, and wage data.