The euro has been supported by inflation-sensitive fundamentals and cautious central bank expectations, with markets focused on rising energy-driven price pressures and the prospect that both the ECB and Fed will signal vigilance around upside inflation risks at upcmoming policy decisions. Attention has centered on the preliminary German HICP release, where an expected acceleration in inflation reinforces concern that higher energy costs are complicating the disinflation path, while traders are looking to both Christine Lagarde and Jerome Powell for any indication policymakers are leaning less dovish as markets reassess the scope for future easing. Alongside the policy decisions themselves, the interaction between Fed and ECB messaging on inflation, growth and rates is a major driver for the euro today and tomorrow, with broader geopolitical tensions and supply-side energy risks continuing to feed directly into euro area fundamentals and price action.

The yen has traded with a mixed tone, with price action shaped by the balance between the Bank of Japan’s hawkish-leaning hold and external pressures from elevated energy costs and broader geopolitical risk. While supply disruptions and uncertainty around US-Iran diplomacy have weighed through Japan’s import-sensitive macro outlook and supported some upside in USDJPY, intervention sensitivity around yen weakness and expectations the BoJ remains on a gradual normalization path have helped limit losses. Focus has now shifted to tonight’s Fed decision, where markets are watching whether Jerome Powell reinforces dollar strength through a hawkish inflation message or opens the door to renewed yen support via softer US rate expectations, making the Fed-BoJ policy divergence and geopolitical backdrop the key drivers for the yen.

The Australian dollar has come under modest pressure after softer-than-expected inflation data components tempered expectations for a more hawkish RBA path, with the CPI release seen easing some concern that rising energy and freight costs were feeding into a broader inflation reacceleration. The softer print components have shifted focus toward a less urgent policy outlook from the RBA and weighed on the Aussie at the margin, though broader support from commodity dynamics and resilient risk sentiment has helped limit downside. Attention now turns to tonight’s Fed decision, where markets will be watching whether Jerome Powell leans hawkish on inflation risks, with the interaction between a potentially less supportive RBA outlook and broader dollar direction from the Fed now the key driver for the Australian dollar alongside ongoing geopolitical and commodity-related risks.