The euro is trading with a modestly firmer tone against the US dollar after recovering from earlier losses as broad-based dollar selling outweighed support for the greenback from renewed geopolitical tensions and a hawkish set of Federal Reserve minutes. While the Fed reinforced a higher-for-longer policy message and kept the prospect of further tightening on the table if inflation remains stubborn, markets focused more on softer US growth expectations and recent signs of labor market cooling, limiting the dollar’s upside. On the euro side, expectations that the European Central Bank may need to keep policy restrictive have been supported by comments from ECB policymakers, including Schnabel and Panetta, who warned that heightened tensions in the Middle East and the risk of energy supply disruptions through the Strait of Hormuz could sustain inflationary pressures despite a fragile growth backdrop. That combination of persistent inflation risks and cautious central bank rhetoric has helped underpin the single currency, although escalating US-Iran tensions and the resulting risk-off mood continue to cap upside as investors weigh the implications of higher energy prices and slower global growth.

The pound has found renewed support as broad-based US Dollar weakness offsets lingering geopolitical uncertainty and mixed domestic fundamentals, allowing GBPUSD to push back above the 1.3400 level. Markets continue to price a more hawkish path from the Bank of England, with expectations for at least one additional rate hike this year firming amid persistent services inflation and renewed upside risks to energy prices following the escalation in Middle East tensions. However, sterling’s gains remain tempered by evidence of a slowing UK economy, including softer activity, easing wage growth and a weakening labor market, reinforcing the difficult balancing act facing policymakers between containing inflation and supporting growth. Political developments are also in focus following Prime Minister Starmer’s resignation, although expectations of policy continuity under likely successor Andy Burnham have helped limit market uncertainty. Meanwhile, the latest FOMC minutes reinforced the prospect of US rates remaining higher for longer, but a subsequent pullback in the US Dollar has ultimately allowed sterling to regain the upper hand despite the broader backdrop of elevated geopolitical risks.

The yen remains under pressure as a widening US-Japan yield differential continues to favor the dollar, with hawkish Federal Reserve minutes reinforcing expectations that US interest rates will stay higher for longer and lifting Treasury yields. While renewed US-Iran tensions and concerns over the Strait of Hormuz have supported safe-haven demand for the greenback, the yen has failed to benefit meaningfully as investors remain focused on the Bank of Japan’s still-accommodative policy outlook. Dovish comments from BoJ board member Asada, who reiterated that clearer evidence of demand-driven inflation is needed before backing further rate hikes, reinforced expectations that any additional policy tightening will be gradual. At the same time, Japan’s dependence on imported energy leaves the yen vulnerable to higher oil prices stemming from geopolitical risks. Nevertheless, traders remain alert to the growing risk of official intervention as USDJPY trades near multi-decade highs, with speculative short-yen positioning still heavily stretched, raising the prospect of a sharp reversal should Japanese authorities decide to step into the market.

The Australian dollar is trading in a relatively tight range as competing fundamental forces leave investors without a clear directional catalyst. On one hand, the currency continues to find support from the Reserve Bank of Australia’s still-hawkish policy stance, with policymakers maintaining that inflation remains too high to rule out further tightening despite recent signs of easing price pressures. On the other hand, the release of hawkish Federal Reserve minutes has reinforced expectations that US interest rates could remain higher for longer, limiting the Aussie’s upside by supporting the US dollar. Heightened geopolitical tensions in the Middle East have also created offsetting effects, weighing on broader risk sentiment while simultaneously boosting commodity prices, which offers some support to Australia’s terms of trade as a major energy exporter. However, with iron ore and Chinese demand remaining the key drivers of Australia’s external outlook, investors are now looking to China’s latest inflation data for clearer signals on the health of domestic demand and the broader economic recovery. Until either Chinese data or incoming US economic releases materially shift interest rate expectations, the Australian dollar is likely to remain driven by the balance between resilient commodity prices, global risk appetite and the evolving policy outlook from both the RBA and the Federal Reserve.