The euro is holding modest gains as expectations for a Fed pause next week temper dollar demand, although French fiscal concerns continue to limit upside. Rising French borrowing costs and unrest over public service cuts have reinforced doubts about the government’s ability to rein in its deficit. Even so, the euro’s resilience to higher natural gas prices and bond market stress suggests much of the negative news may already be reflected in positioning. Policy expectations offer some support, with the ECB widely expected to hold next week while markets anticipate a hike before year-end. Attention now turns to comments from ECB policymaker Panetta and whether the approaching central bank decisions provide enough clarity to break the current stalemate.

The pound remains supported by rising expectations for a Bank of England rate hike in November after UK inflation climbed to an 11-month high in September, while declining US Treasury yields and a subdued dollar have provided an additional lift. The key driver is the relative interest rate outlook, with renewed UK inflation pressure reinforcing expectations for tighter monetary policy and helping sterling preserve its recent gains. However, Middle East tensions and elevated oil prices remain potential constraints, as further energy inflation could reinforce expectations for a December Fed hike, while any deterioration in risk sentiment could revive safe-haven dollar demand.

The yen is drawing support from falling US Treasury yields and a broadly softer dollar, with a narrowing yield differential helping the currency recover. Governor Ueda’s recent hawkish remarks have also reinforced expectations for further Bank of Japan tightening, potentially as soon as December, while concern over possible Japanese intervention adds another layer of support. However, the recovery remains vulnerable to a reversal in US yields, as energy-related inflation concerns keep the prospect of further Fed tightening alive. Escalating Middle East tensions could also support demand for the dollar, leaving the yen’s outlook sensitive to energy prices and policy guidance from next week’s Fed and BoJ meetings.

The Australian dollar has softened as Middle East tensions weigh on risk appetite and encourage safe-haven demand for the US dollar, offsetting support from increasingly hawkish RBA expectations. Deputy Governor Hauser’s warning that the inflation outlook has deteriorated materially has lifted expectations for another rate increase as soon as November, with domestic capacity constraints, technology prices, and strong data center investment adding to inflation concerns. These pressures are supporting Australian interest rate expectations, but the currency remains sensitive to geopolitical developments and the outlook for US monetary policy. With the Fed keeping its options open, upcoming US data and moves in Treasury yields remain key catalysts for whether the Aussie can regain momentum.