The euro has been trading on the defensive against the dollar, with EURUSD slipping back toward the mid-1.1500s as markets brace for the Federal Reserve decision. The dominant driver has been a renewed widening in the perceived policy gap between the Fed and ECB, with the Fed widely expected to raise rates by 25 basis points and markets increasingly focused on the possibility of another hike later this year as US inflation remains sticky. This contrasts with the euro’s own supportive backdrop after the ECB’s recent rate increase and relatively hawkish messaging, which has kept expectations for additional tightening alive but has struggled to offset the latest repricing in US rates. As a result, near-term euro direction remains heavily tied to the Fed, with particular attention on Chair Warsh’s guidance and whether policymakers validate the market’s increasingly hawkish expectations or push back against the prospect of further tightening

Sterling has been trading on the defensive into a heavy week of central-bank risk, with the pound slipping below 1.3500 against the dollar as markets position for a likely Fed rate hike and Thursday’s Bank of England decision. The latest UK inflation report did little to materially shift the domestic policy outlook, with headline CPI rising as expected to 3.1% year-on-year in August from 2.9%, while core inflation held steady at 2.6%, reinforcing the picture of renewed price pressure without a significant acceleration in underlying inflation. The BoE is still widely expected to leave rates unchanged at 3.75% on Thursday, particularly after Governor Bailey recently pushed back against the idea that another rate hike is inevitable, although persistent inflation keeps the possibility of further tightening later in the year alive. For now, this leaves the pound caught between lingering expectations for tighter UK policy and near-term support for the dollar from a more hawkish Fed outlook.

The yen has remained under pressure against the dollar in recent sessions, with USDJPY pushing to a one-week high as rising US Treasury yields and expectations for another Federal Reserve rate hike have reinforced the dollar’s yield advantage. At the same time, downside pressure on the yen has been contained by a sharp hawkish repricing of the Bank of Japan outlook, with markets expecting the BoJ to raise rates at Friday’s meeting and increasingly focused on whether policymakers signal further tightening beyond September. Japan’s latest trade figures have added to the policy debate, with higher energy costs driving imports sharply higher and highlighting the inflationary impact of elevated oil prices on an economy heavily dependent on imported fuel. For now, USDJPY is caught between competing forces, with elevated US yields and Fed tightening expectations weighing on the yen, while expectations for continued BoJ normalization provide an important offset ahead of this week’s closely watched Fed and BoJ decisions.

The Australian dollar has come under pressure in recent sessions, with broad US dollar strength and the sharp rise in US Treasury yields outweighing what remains a relatively supportive domestic rates backdrop. Expectations for a Federal Reserve rate hike have surged ahead of Wednesday’s decision as persistent inflation and elevated oil prices reinforce the case for tighter US policy, weighing on the Aussie and broader risk sentiment. At home, however, the RBA remains firmly focused on inflation after holding the cash rate at 4.35%, with stubborn underlying price pressures keeping the prospect of further tightening firmly in play. Markets are assigning a high probability to another RBA hike at the late-September meeting, while the recent jump in Australian bond yields provides some underlying support for the currency. For now, the Aussie is caught between increasingly hawkish RBA expectations on one side and a stronger dollar, higher global yields and softer risk appetite on the other, leaving the Fed decision and its guidance on the path for rates as the dominant near-term driver.