The euro has come back under pressure, with EURUSD slipping toward the mid-1.1400s as the policy narrative has shifted back in favor of the dollar. The Fed delivered its widely expected 25bp hike, its first increase in three years, but importantly kept the door open to additional tightening as officials remain concerned about persistent inflation, reinforcing expectations that another hike could follow later this year. On the European side, the ECB also raised rates last week, but the message has been more cautious, with President Lagarde emphasizing a data-dependent approach and refusing to pre-commit to further tightening. While elevated energy costs are expected to keep Eurozone inflation high, there is still limited evidence that the supply-driven shock is broadening into more persistent underlying price pressures. The resulting contrast between a Fed signaling scope for further hikes and an ECB pushing back against aggressive market tightening expectations has narrowed the euro’s relative policy support and helped drive the latest pullback.

The pound has come under renewed pressure, falling below 1.3400 against the dollar as the combination of a hawkish Federal Reserve and uncertainty ahead of today’s Bank of England decision weighs on the currency. The Fed’s rate hike and signal that further tightening remains likely have driven a broader dollar rally, while the BoE is widely expected to leave rates unchanged at 3.75%, putting the emphasis firmly on the Bank’s guidance and voting split. UK inflation accelerated to 3.1% in August from 2.9%, largely reflecting higher energy and motor fuel costs, but underlying pressures were more contained, with core inflation holding at 2.6% and services inflation steady at 3.4%. This leaves the BoE facing a difficult balance between renewed energy-driven inflation risks and signs of cooling in the labor market and broader economy. Markets have substantially increased expectations for further BoE tightening, with a November hike heavily priced, meaning sterling’s reaction today is likely to depend on whether policymakers validate those expectations or push back against the increasingly hawkish rate path.

The yen has regained some ground after coming under pressure in the wake of the Fed decision, with USDJPY pulling back toward 156 after reaching a near two-week high. The dominant domestic driver remains expectations for the Bank of Japan, which is widely expected to raise rates by 25 basis points to 1.25% on Friday, the highest level in 31 years, as policymakers respond to persistent inflation risks from elevated energy prices and the weaker yen. More importantly, markets are increasingly focused on whether Governor Ueda signals that further tightening could follow, with expectations for a faster normalization path helping to provide underlying support for the yen. At the same time, the currency remains caught between this increasingly hawkish BoJ outlook and renewed dollar strength after the Fed raised rates and signaled scope for another increase this year. Rising US yields and continued Middle East tensions have further supported the dollar, limiting the yen’s recovery. Japanese officials have also reiterated their readiness to respond to excessive currency volatility, adding another layer of support against renewed sharp yen depreciation.

The Australian dollar has been holding up reasonably well despite a renewed US dollar bid following the Fed’s widely expected rate hike, with domestic rate expectations continuing to provide an important source of support. The RBA has already delivered three consecutive hikes this year and markets continue to price a meaningful chance of another increase at the upcoming meeting as inflation pressures remain elevated. That hawkish backdrop was reinforced by the IMF, which said the RBA should remain prepared to tighten further given upside inflation risks, while also calling for greater fiscal restraint to help the disinflation process. For now, the Aussie is therefore caught between competing forces, with a hawkish Fed and broader US dollar strength limiting the topside, while expectations for additional RBA tightening are helping to cushion the currency against more significant weakness.