The euro remains well supported on a combination of improving risk sentiment, relative growth resilience, and a less negative rates outlook. Most recently, reports of progress toward a US-Iran agreement and an extension of the ceasefire have helped underpin broader risk appetite, encouraging demand for pro-cyclical currencies including the euro. At the same time, softer-than-expected monthly US core PCE inflation and signs of moderating US growth have reinforced expectations that the Federal Reserve will be able to adopt a less restrictive policy stance going forward, weighing on the US dollar. On the euro side, investors continue to draw support from expectations that the ECB is nearing the end of its easing cycle, while Germany’s fiscal expansion plans and increased European defense and infrastructure spending are seen as constructive for the medium-term growth outlook. The result has been a continuation of the favorable EURUSD dynamic, with dips attracting demand amid a still-broad trend of dollar weakness.

Japan fundamentals remain mixed for the yen. On one hand, BoJ Governor Ueda’s recent remarks reinforced expectations that the central bank remains concerned about inflation becoming embedded through wages and inflation expectations, keeping the prospect of further policy normalization alive. However, the latest Tokyo CPI report complicated that narrative, with headline, core, and core-core inflation all slowing more than expected in May, reducing the urgency for a June rate hike and prompting some investors to push expectations toward a later move despite markets still assigning a relatively high probability of tightening in the months ahead. At the same time, stronger-than-expected April retail sales and industrial production data suggest domestic demand and manufacturing activity remain resilient, helping to offset concerns about the broader economy. The dominant driver of yen weakness continues to be the wide US-Japan rate differential, with US yields remaining elevated relative to JGB yields, while Japan’s dependence on imported energy leaves the economy vulnerable to higher oil prices and a weaker currency. Against this backdrop, intervention risks have become an increasingly important support factor, with USDJPY once again approaching the psychologically important ¥160 level. Market participants are awaiting official Ministry of Finance intervention data, with estimates suggesting authorities may have spent as much as ¥10 trillion defending the currency in late April and early May. While intervention fears may slow the pace of depreciation, investors generally view direct FX operations as a temporary tool rather than a lasting solution unless accompanied by a meaningful narrowing in US-Japan yield differentials through further BoJ tightening.

The Australian dollar has been trading with a mixed fundamental backdrop, caught between shifting global risk sentiment and a material repricing of RBA expectations. Recent Australian inflation data surprised to the downside, with both monthly and annual CPI readings cooling faster than anticipated, prompting markets to sharply scale back expectations for additional RBA tightening. Following the data, the probability of a near-term rate hike was largely priced out, while expectations for further policy tightening later in the year were significantly reduced, undermining a key source of support for the currency. At the same time, escalating geopolitical tensions in the Middle East have weighed on broader risk appetite, typically a headwind for the risk-sensitive Australian dollar. However, intermittent bouts of US dollar weakness, driven by hopes of de-escalation in the region and evolving expectations around the US policy outlook, have helped cushion downside pressure. As a result, AUDUSD remains range-bound, with softer domestic inflation and a less hawkish RBA offsetting support from periods of improved global sentiment and US dollar consolidation.