The euro remains supported by the prospect of relatively tight ECB policy, although gains have become more measured as markets balance easing inflation against persistent energy-related price risks. The ECB is widely expected to leave interest rates unchanged this week after June’s hike, with investors instead focused on President Lagarde’s guidance for signs that another increase, most likely in September, remains on the table if inflation pressures persist. At the same time, softer June inflation data in both the Eurozone and the US has reduced expectations for immediate policy tightening on either side of the Atlantic, limiting directional conviction in EURUSD. Rising oil prices driven by Middle East tensions continue to complicate the inflation outlook, supporting the case for higher-for-longer interest rates, while a modest recovery in the US dollar following stronger US economic data has capped the euro’s upside. Looking ahead, the focus shifts to a busy Eurozone week, including German producer prices, the ZEW economic sentiment surveys, the ECB’s Bank Lending Survey, Thursday’s ECB policy decision and Friday’s flash PMIs, all of which will help shape expectations for the region’s growth outlook and the timing of any further ECB tightening.

The Pound has softened against the US Dollar as renewed geopolitical tensions in the Middle East boosted safe-haven demand for the Greenback and pushed oil prices above $80 per barrel, raising concerns that higher energy costs could keep inflation elevated on both sides of the Atlantic. At the same time, softer US CPI and PPI data have tempered expectations for additional near-term Federal Reserve tightening, limiting broader Dollar upside and helping Sterling hold onto recent gains. Domestically, the focus shifts to a pivotal week of UK data, with labor market figures, inflation, Retail Sales and preliminary PMIs all due before week’s end. Markets expect wage growth to remain firm, unemployment to hold at 4.9% and core inflation to edge lower, with any upside surprises in earnings or prices likely to reinforce expectations that the Bank of England will keep monetary policy restrictive for longer, while weaker employment or consumer data could revive expectations of future easing and weigh on the Pound. Investors are also watching the transition to Prime Minister Andy Burnham’s government for any signs of fiscal continuity, although monetary policy expectations and incoming economic data remain the dominant drivers of Sterling.

The Yen remains under pressure as the wide interest rate differential between Japan and the United States continues to favor the US Dollar, keeping USDJPY near multi-decade highs around 162.50. Markets remain alert to the risk of official intervention after Finance Minister Katayama reiterated that authorities stand ready to take “decisive action at any time,” although repeated verbal warnings have so far done little to deter Yen selling. Attention now shifts to Japan’s key economic releases, with trade data expected to show another solid rebound in exports alongside stronger imports and a narrower trade deficit, while Friday’s inflation report is forecast to show core CPI (excluding fresh food) accelerating to 1.6% from 1.4%. A firmer inflation reading would reinforce expectations that the Bank of Japan could continue gradually normalizing monetary policy later this year, offering some support to the Yen, though any sustained recovery is likely to depend on both BoJ tightening expectations and the outlook for Federal Reserve policy.

The Australian Dollar remains primarily driven by shifting US Dollar sentiment and expectations surrounding domestic and Chinese growth. AUDUSD has traded around the 0.6980 area after recovering from an initial pullback as mixed US data, including stronger Housing Starts and consumer sentiment but softer Building Permits and Industrial Production, weighed on the Greenback despite continued hawkish commentary from Fed officials that inflation remains too elevated. Attention now turns to Wednesday’s Australian labor market report, where employment growth is expected to slow to 15K while the unemployment rate is seen holding at 4.4%, followed by Thursday’s preliminary PMI surveys for fresh insight into economic momentum. Markets will also closely watch China’s decision on its benchmark lending rate, with the People’s Bank of China widely expected to leave rates unchanged at 3.0%, given Australia’s strong trade exposure to China. Meanwhile, rising oil prices amid ongoing Middle East tensions have added to global inflation concerns and could help underpin Australia’s commodity-linked currency if risk sentiment remains resilient, although any further deterioration in global risk appetite would likely temper gains in the high-beta Australian Dollar.