The euro has seen some profit-taking after its sharp advance rather than a material deterioration in the single currency’s fundamentals. The July Fed minutes revealed increased concern over persistent inflation and showed that many officials believe higher rates may be required if price pressures fail to ease, providing the dollar with some near-term support. However, softer US inflation and employment data have reduced expectations for an imminent Fed move, limiting the euro’s downside. Meanwhile, the prospect of further ECB tightening remains a key source of support, with markets assigning a high probability to a 25-basis-point September hike and pricing roughly 45 basis points of additional tightening this year. Eurozone inflation rose to 2.9% in July, elevated energy prices threaten further pressure, and a somewhat firmer regional growth outlook is reinforcing the upward repricing in European rates, leaving the relative policy backdrop broadly supportive for the euro despite its latest pullback.

The pound’s downside remains limited on account of a broad based US Dollar selloff and after UK headline inflation accelerated from 2.6% to 2.9% in July, slightly above the Bank of England’s forecast, reinforcing market expectations for at least one rate hike before year-end. The details however, were less decisively hawkish, with core inflation steady, services inflation easing and wage growth slowing, while weaker UK employment figures have also highlighted risks to the economic outlook. But ultimately, the pound remains well supported by a relatively firm BoE rate path, with further gains dependent on whether incoming data validates market pricing that remains more hawkish than the consensus among economists.

The yen remains under pressure as Japan’s trade deficit widened to ¥634.5 billion in July, with a sharp rise in imports outpacing record exports and reinforcing concerns over the economic impact of elevated energy and other imported costs. Wide US-Japan interest-rate differentials continue to favor USDJPY, while fiscal concerns have added to the yen’s vulnerability. The dollar has also found some support from hawkish-leaning Fed minutes, although softer US inflation pressures and reduced expectations for a near-term Fed rate hike have limited the upside. Looking ahead, the yen’s prospects may depend heavily on whether energy prices retreat, the Bank of Japan maintains a credible path toward further tightening, or Japanese authorities intervene again as USDJPY trades near levels that could increase official concern.

The Australian dollar’s latest run of gains has been capped after a disappointing domestic labor report raised concerns about the economy and reduced the likelihood of near-term Reserve Bank of Australia tightening. Australia’s unemployment rate unexpectedly rose to 4.5% in July, while employment fell by 15,800 following June’s sharp 80,200 increase, falling well short of expectations for a 15,000 gain. Markets are consequently pricing only a modest chance of further RBA tightening, while weaker Chinese demand for Australian commodities and broader concerns over China’s economy remain additional headwinds for the currency. Nevertheless, the downside in AUDUSD has been partly contained by a softer US dollar, as cooling US inflation pressures have reduced expectations for an imminent Federal Reserve rate increase, despite the latest Fed minutes showing officials remain prepared to tighten if inflation fails to ease.