The euro has remained underpinned against the US dollar, with EURUSD holding firm near the mid-1.16s as a combination of softer US dollar sentiment and relatively resilient Eurozone fundamentals continues to support the single currency. A key driver at the start of the week has been improving global risk appetite following comments from US President Donald Trump suggesting a US-Iran agreement is “largely negotiated,” fueling hopes of lower geopolitical tensions and helping trigger a sharp decline in oil prices. The move lower in energy prices has weighed on the dollar by encouraging markets to modestly scale back hawkish Federal Reserve expectations, while broader risk-on flows have further reduced demand for traditional safe havens. At the same time, ECB rhetoric has continued to lean relatively firm, with policymakers increasingly acknowledging the risk of renewed inflation pressures and signaling that the easing cycle may be nearing its end. Comments from ECB officials, including Belgium’s Pierre Wunsch warning that the Eurozone may be at the “beginning of an inflation problem,” have helped reinforce expectations that rates in Europe could remain restrictive for longer than previously assumed. More broadly, narrowing US-Eurozone rate differentials, persistent concerns over the US fiscal outlook, and continued reserve diversification away from the dollar have also contributed to ongoing structural support for the euro.

The yen has found renewed support in recent sessions, with USDJPY pulling back as easing geopolitical tensions in the Middle East helped drive oil prices lower, improving Japan’s terms of trade given the country’s heavy reliance on imported energy. Reports pointing toward progress on a potential US-Iran agreement and a reopening of the Strait of Hormuz have reduced immediate supply concerns and weighed on the dollar’s safe-haven appeal. At the same time, markets remain highly sensitive to the risk of Japanese official intervention should USDJPY move back toward the 160 level, a threshold that previously triggered action from Tokyo earlier this year. On the domestic side, softer Japanese inflation data has tempered expectations for near-term Bank of Japan tightening, though underlying resilience in the economy and the prospect of gradually rising wages continue to support expectations that the BoJ will maintain a slow normalization path. Meanwhile, the broader dollar outlook remains mixed, as sticky US inflation has led markets to scale back expectations for Fed easing, limiting the extent of yen appreciation despite the recent improvement in risk sentiment.

The Australian dollar has been supported at the start of the week by an improvement in broader market risk sentiment, with optimism surrounding a potential US-Iran peace agreement weighing on the safe-haven US dollar and helping AUDUSD recover from last week’s lows. At the same time, the move higher in the Aussie has remained measured as investors continue to balance improving global sentiment against lingering geopolitical uncertainty, particularly around the Strait of Hormuz and Iran’s nuclear program. The currency has also continued to draw underlying support from Australia’s close correlation with global growth expectations and commodity demand, especially from China, though gains have been tempered by expectations that the Federal Reserve could still keep rates elevated for longer if US inflation remains sticky. Overall, the AUD remains caught between improving risk appetite and resilient US yield support, limiting the scope for a more aggressive upside move.