The euro remains under pressure against the US dollar after the ECB left interest rates unchanged and struck a cautious tone, acknowledging that while inflation is moving toward target, elevated uncertainty and the full impact of higher energy prices have yet to feed through to the economy. Although the central bank reiterated its data-dependent approach and warned that persistent energy shocks pose upside inflation risks, markets interpreted the overall message as offering little urgency for additional tightening. At the same time, broad-based US dollar strength has been fueled by escalating Middle East tensions, rising oil prices, and growing expectations that energy-driven inflation could keep the Federal Reserve on a more hawkish path, with markets continuing to price a meaningful chance of further rate hikes. Risk aversion has also intensified following renewed US military threats against Iran, continued attacks in the Red Sea, and fresh US tariff plans that would include at least a 10% levy on European Union imports, adding another headwind for the common currency.

The pound remains under pressure primarily as a result of broad-based US Dollar strength rather than any significant deterioration in UK-specific fundamentals. Sterling has been weighed down by a sharp rise in geopolitical tensions in the Middle East, which has fueled demand for the safe-haven Dollar while higher oil prices have reinforced expectations that the Federal Reserve may need to keep policy restrictive for longer. Domestically, UK inflation offered a mixed picture, with headline CPI slowing to 2.6% in June, supporting expectations that the Bank of England will leave rates unchanged next week, although sticky core inflation continues to justify a cautious and relatively hawkish stance. Markets continue to price in the possibility of one or two additional BoE rate hikes into 2026, but that has done little to support the pound as investors remain focused on the widening risk premium favoring the Dollar. Attention now turns to UK retail sales and flash PMIs, which will provide a timely gauge of domestic demand and business activity ahead of next week’s closely watched BoE policy decision.

The Yen remains under pressure near 40-year lows as the wide US-Japan interest rate differential, elevated US Treasury yields and a resilient US Dollar continue to outweigh improving domestic fundamentals. June CPI and July PMI data reinforced the view that inflation pressures are becoming more entrenched and economic activity remains resilient, but markets still expect the Bank of Japan to leave rates unchanged next week despite maintaining a gradual tightening bias. Meanwhile, higher oil prices driven by Middle East tensions continue to support expectations that the Federal Reserve will keep policy restrictive for longer, sustaining carry trade demand and weighing on the Yen. Intervention risks remain elevated after Finance Minister Katayama reiterated that Japan stands ready to take decisive action in the FX market and confirmed close coordination with the US, though markets continue to believe any intervention is unlikely to produce a lasting reversal without a narrowing in the US-Japan rate differential. Attention now turns to next week’s Fed and BoJ policy meetings as the key catalysts for USDJPY.

The Australian dollar remains caught between supportive domestic fundamentals and a stronger external backdrop favoring the US dollar. While Australia’s economic data have continued to surprise on the upside, highlighted by a blockbuster June employment report and stronger-than-expected July flash PMIs that point to resilient momentum across both the manufacturing and services sectors, the currency has struggled to capitalize. Instead, the Aussie has been weighed down by broad US dollar strength as resilient US labor market data, rising Treasury yields and renewed concerns that higher energy prices could keep the Federal Reserve on a more hawkish path have boosted Fed rate expectations. At the same time, escalating US-Iran tensions have supported safe-haven demand for the US dollar while dampening broader risk appetite, a headwind for the risk-sensitive Australian dollar. Even so, the combination of firm domestic economic data and a still relatively hawkish Reserve Bank of Australia continues to provide an important medium-term underpinning for the currency, limiting the scope for more aggressive downside moves.