The euro remains close to a two-month high, supported by growing expectations that the ECB will deliver another 25-basis-point rate hike in September as euro-area inflation remains elevated. The euro has also benefited from broad dollar weakness after softer US inflation, employment and retail-sales data reduced expectations for an imminent Fed hike. However, renewed strength in oil prices is limiting the euro’s advance by reviving US inflation concerns and safe-haven demand for the dollar, while also posing a potential terms-of-trade and growth headwind for the energy-importing euro area. The near-term balance therefore remains modestly constructive for the euro, although Wednesday’s FOMC minutes will be important in determining whether the recent pullback in Fed tightening expectations, and corresponding pressure on the dollar, can be sustained. September Fed hike expectations have fallen sharply following the latest softer US data.

The pound remains supported against the dollar, primarily reflecting a favorable shift in relative rate expectations. Softer US inflation, producer-price and retail-sales data have reduced the perceived likelihood of a September Federal Reserve rate hike, weighing on the dollar, while resilient UK growth and recent hawkish comments from Bank of England Chief Economist Pill have reinforced expectations that the BoE could raise rates at least once this year. Sterling’s advance has nevertheless become more cautious ahead of a busy UK data calendar, beginning with Tuesday’s employment report and followed by inflation and retail-sales figures. Particular attention will be paid to unemployment and wage growth, with the latter offering an important signal on domestic inflation persistence and the scope for further BoE tightening. The latest available official figures showed unemployment at 4.9%, although continuing concerns over the reliability of the UK Labour Force Survey warrant some caution when interpreting the release.

The yen remains close to a two-week low against the dollar, with hawkish Bank of Japan expectations struggling to offset concerns about the strength of Japan’s economy. Markets continue to price a high probability of a 25-basis-point BoJ rate increase in September, supported by the latest Summary of Opinions showing that several policymakers favor further tightening amid persistent upside inflation risks. However, weaker-than-expected second-quarter GDP growth, alongside signs that the expansion relied heavily on net exports, government consumption and inventories rather than domestic demand, has raised doubts about how aggressively the BoJ can proceed. At the same time, softer US economic data and reduced expectations for a September Fed hike are helping to limit additional yen selling, leaving USDJPY caught between narrowing policy-rate expectations and lingering concerns over Japan’s underlying growth momentum ahead of Wednesday’s FOMC minutes.

The Australian Dollar remains well supported, benefiting primarily from broad US Dollar weakness as softer US labor, inflation and retail-sales data have reduced expectations for a Federal Reserve rate hike in September. Domestically, sentiment improved after the RBA held the cash rate at 4.35%, with the Westpac Consumer Confidence Index rising 6.0% in August, although it remains well below year-ago levels. The RBA continues to signal that inflation is too high and has not ruled out further tightening, providing an additional yield-based tailwind for the currency, even as markets lean toward an extended pause. Attention now turns to Wednesday’s second-quarter Wage Price Index and Thursday’s labor-market report, although broadly expected outcomes are unlikely to materially alter RBA pricing. Meanwhile, escalating US-Iran tensions and the continued disruption to Middle East shipping present a mixed influence, potentially supporting the Aussie through higher commodity prices while limiting gains through weaker global risk appetite.