The euro is trying to recover after the latest dip, supported by increasingly hawkish ECB expectations as officials emphasize upside inflation risks from energy prices and resilient growth. Recent comments from Isabel Schnabel have reinforced expectations for a September rate hike and the possibility of further tightening in the coming quarters, although lingering concerns about the Eurozone growth outlook continue to limit demand for the currency. Attention now turns to preliminary German inflation data, with both headline CPI and harmonized inflation expected to accelerate in August. A stronger reading would reinforce the case for ECB tightening and could provide the euro with additional support. At the same time, gains have been restrained by Fed Chair Kevin Warsh’s warning that policymakers still have work to do if underlying inflation does not move convincingly toward target, which has pushed up expectations for a September Fed hike and kept the broader rate differential supportive of the dollar.

The pound has started the week on a firmer footing, recovering some of Friday’s heavy losses as the US dollar eases from a nearly two-week high following month-end demand. Sterling has also drawn modest support from the UK government’s renewed emphasis on fiscal discipline ahead of the October Budget, though upside remains limited by the widening policy-rate outlook between the Bank of England and Federal Reserve. Markets have pushed expectations for the next BoE rate increase into 2027, while Fed Chair Kevin Warsh’s hawkish comments have revived the possibility of a September hike. Renewed US-Iran tensions are providing an additional layer of support for the safe-haven dollar, leaving the pound vulnerable as attention shifts to this week’s US data, culminating in Friday’s employment report.

The yen remains under pressure near a one-month low against the dollar, with USDJPY hovering around the 160.00 level as the wide US-Japan interest-rate gap continues to encourage carry-trade demand. The Bank of Japan raised rates to 1.00% in June and markets see a strong chance of another increase in September, but this has been outweighed by expectations that the Federal Reserve could also tighten policy following Chair Kevin Warsh’s hawkish Jackson Hole remarks. Concerns surrounding Japan’s deteriorating public finances and expansionary fiscal policy have added to the yen’s weakness, while comments from US Treasury Secretary Scott Bessent describing the recent move as contained have reduced expectations for coordinated intervention. Renewed US-Iran hostilities have also favored the dollar as the market’s preferred safe haven, although the proximity of USDJPY to 160.00 should keep the threat of unilateral Japanese intervention firmly in focus.

The Australian dollar remains supported by a relatively hawkish domestic policy outlook, after strong inflation data reinforced expectations that the Reserve Bank of Australia may need to raise rates again. The currency has also benefited from softer US Treasury yields and a modest pullback in the US dollar, although its upside has been constrained by renewed expectations for a September Federal Reserve rate hike and escalating US-Iran tensions, which have encouraged safe-haven demand for the greenback. More broadly, the Aussie remains sensitive to shifts in global risk appetite and the outlook for China, leaving the contrast between increasingly hawkish RBA expectations and continued US dollar support as the key near-term driver.