The euro is finding some support from a softer dollar following disappointing US consumer sentiment, though rising inflation expectations complicate the Fed outlook and limit the scope for sustained relief. France’s fiscal and political uncertainty remains the main European headwind, with the selloff in government bonds raising concerns about borrowing costs and putting Italy’s budget plans under closer scrutiny. Resilient euro area activity, including an improved German growth outlook, provides a counterweight, while energy-driven inflation keeps the ECB cautious even as higher financing costs threaten growth. Potentially escalating trade tensions with China add another downside risk, leaving the euro’s recovery dependent on easing sovereign debt concerns and a more durable retreat in dollar strength.

The pound is finding support at the start of the week as softer US Treasury yields weigh on the dollar, while renewed commitments to UK fiscal discipline offer some reassurance amid lingering concerns over the public finances. Attention now turns to UK growth data and comments from Bank of England Governor Andrew Bailey for clues on the economic outlook and policy path, with US inflation figures and Federal Reserve communication likely to shape the dollar side of the equation. Sterling’s recovery remains tentative, however, as uncertainty ahead of the UK budget and persistent Middle East tensions could restrain demand, particularly if renewed escalation boosts the dollar’s safe-haven appeal.

The yen is trading cautiously in holiday-thinned conditions, with expectations that the Bank of Japan will pause after September’s rate increase limiting support from domestic monetary policy. However, persistent cost pressures and Ueda’s concern about inflation overshooting target keep further tightening on the horizon. Softer US consumer sentiment and reduced expectations for an October Fed hike are providing some relief through the dollar, although the prospect of subsequent US tightening continues to constrain yen gains. Middle East tensions add uncertainty, with energy supply risks particularly relevant to Japan’s import-dependent economy. Attention now turns to this week’s US inflation releases, which could reshape Fed expectations and the yield differential driving dollar-yen.

The Australian dollar is drawing modest support from softer US consumer sentiment and reduced expectations for an October Fed rate hike, while easing US Treasury volatility offers a steadier backdrop for risk-sensitive currencies. However, upside remains constrained by declining expectations for a November RBA hike after Australian inflation met forecasts, leaving investors looking to Tuesday’s meeting minutes for guidance on the tightening outlook. On the US side, higher consumer inflation expectations and hawkish comments from Fed officials suggest further tightening remains possible even if policymakers pause this month. The balance leaves the Aussie supported by near-term dollar softness but vulnerable to renewed US inflation pressure and any deterioration in global risk appetite.