Central bank policy divergence, with the Federal Reserve likely cutting rates while the ECB holds steady, supports a stronger euro, with one bank forecasting a rise above $1.20 by year-end. German industrial production in July exceeded expectations, hinting at stabilization, but a narrowing trade surplus and weaker exports highlight ongoing challenges for Germany’s export-driven economy, with recovery prospects uncertain amid potential U.S. tariff risks in 2025.

The Yen has held up relatively well, despite Japan’s political uncertainty following Ishiba’s resignation, with narrowing U.S.-Japan rate differentials factoring into the price action. Japan’s Q2 GDP growth was revised upward to 2.2%, driven by strong consumption, capital spending, and exports, though new U.S. tariffs may dampen future growth, keeping the Bank of Japan cautious on rate hikes. Political uncertainty, particularly around the Liberal Democratic Party leadership race, risks further yen weakness and higher Japanese government bond yields, with outcomes hinging on whether fiscal expansionist Sanae Takaichi or reform-focused Shinjiro Koizumi wins. Despite some optimism from reduced U.S. tariffs on Japanese autos, the BoJ is unlikely to shift policy soon, though LDP lawmaker Kono Taro supports rate hikes to bolster the yen and curb inflation.

The Australian dollar remains bullish following weak U.S. jobs data, which has increased expectations for a significant Federal Reserve rate cut in September. Upcoming U.S. inflation data (PPI and CPI) and Australian economic indicators, including consumer and business confidence, will influence the AUD’s near-term trajectory. Strong Australian GDP growth, driven by robust household consumption and exports, has reduced the likelihood of a November RBA rate cut to 80%, with the RBA likely to maintain steady rates unless consumer sentiment weakens further. Despite a recent drop in consumer confidence, improved business conditions and positive Chinese economic data support the AUD’s resilience.