The euro has edged higher as the US dollar struggles to sustain its initial gains following hotter-than-expected US inflation, suggesting expectations for further Federal Reserve tightening are already substantially reflected in market pricing. While the CPI surprise strengthened the case for additional rate increases, Mary Daly’s preference for patience has kept an October hike far from assured, leaving US producer prices and retail sales as the next key tests for the dollar. On the European side, concerns over France’s debt and political obstacles to deficit reduction remain a headwind, with Christine Lagarde stressing fiscal consolidation as the solution rather than encouraging expectations of ECB support. The euro’s resilience therefore largely reflects softer dollar demand, while French fiscal risks continue to constrain the outlook.

Sterling is benefiting from a broad pullback in the US Dollar as falling Treasury yields overshadow hotter US inflation data, although more cautious Bank of England commentary is limiting the upside. Chief Economist Pill has pushed back against market pricing for several rate increases, stressing that any near-term hike should not be interpreted as the start of a sustained tightening cycle. That leaves the Pound sensitive to the upcoming UK GDP, industrial production and trade figures, which will help shape expectations for how much tightening the economy can absorb. Meanwhile, US producer price data will provide another test of the inflation outlook, with expectations for further Fed tightening and ongoing Middle East tensions continuing to pose risks to Sterling’s recovery against the Dollar.

The yen is finding support from renewed signals that the Bank of Japan remains committed to policy normalization, with board member Koeda arguing that policymakers should not be overly cautious about further rate increases while financial conditions remain accommodative. Her assessment that underlying inflation is becoming anchored around target, backed by steady wage gains, strengthens the case for additional tightening, while yen depreciation, robust global AI demand and Middle East developments pose upside risks to prices. A pullback in US Treasury yields has also offered the currency some relief, although concerns over a more hawkish Federal Reserve following hotter US inflation remain a counterweight. The focus now turns to whether Koeda’s comments translate into broader support for an early BoJ hike, alongside upcoming US producer prices and retail sales data that could reshape US rate expectations.

The Australian dollar has come under pressure after a sharp deterioration in September’s employment report weakened expectations for another RBA rate hike. Employment fell unexpectedly, reversing August’s gains, while unemployment rose, suggesting restrictive policy is weighing more heavily on the economy. However, falling US Treasury yields and renewed dollar profit-taking have cushioned the decline, even after hotter US inflation reinforced concerns about further Fed tightening. The Aussie remains sensitive to geopolitical uncertainty and broader risk appetite, with upcoming US producer prices and Fed Chair Warsh’s Friday remarks set to shape the next move in interest rate expectations and the US dollar.