The euro has been mostly trading sideways in recent sessions, as markets weigh US tariff threats, trade policy uncertainty, and ongoing US-Iran tensions. Germany’s growing trade deficit with China—driven by concerns over Chinese industrial overcapacity and an undervalued yuan—is adding structural pressure on the euro by undermining European manufacturing competitiveness and increasing the risk of strained EU-China relations. At the same time, weaker inflation readings have put the ECB on the defensive, and any further slowdown in upcoming data could revive rate-cut expectations, adding additional downside risk for the currency.

The yen strengthened modestly following Tokyo CPI data that showed inflation cooling at the headline level but remaining firm underneath, reinforcing expectations that the Bank of Japan will continue gradual rate hikes, potentially as soon as April. While policymakers remain cautious and political pressure favors accommodative policy, markets are increasingly positioning for further normalization, which should be supportive for the yen over time. Still, softer core inflation and wide global rate differentials suggest the yen is more likely to see two-way volatility rather than a sustained one-direction move, even as domestic demand shows signs of improvement.

The Australian dollar is up on the day and continues to build a stronger base above the early-February lows, supported by the RBA’s relatively hawkish stance and resilient domestic fundamentals. While January private credit growth slowed on a monthly basis, annual growth remains firm, and broader data—including solid business investment and inflation still above target—reinforce expectations that policy will stay restrictive for now. This rate advantage versus a more easing-leaning Fed should help underpin the AUD and limit near-term downside, with any further RBA rate hikes more likely later in 2026 as incoming inflation and growth data confirm the outlook.