The euro is back under pressure into Thursday, though price action remains largely range-bound. The macro backdrop has turned slightly more supportive for the euro as the Iran war revives inflation concerns just as the ECB believed conditions were stabilizing. Comments from Peter Kazimir warning that upside inflation risks now “clearly dominate” have prompted markets to price in the possibility of an ECB rate hike by mid-year, with talk of further easing fading. Meanwhile, Isabel Schnabel reiterated that policy is currently in a “good place” but flagged the conflict as an upside inflation risk through energy prices, suggesting policymakers will likely stay on hold for now. Even with potential oil supply relief from coordinated reserve releases, persistent energy volatility and rising inflation expectations point to a higher euro inflation risk premium and a comparatively less dovish ECB than the Fed in the quarters ahead.

The major pair is holding just below the January 14 YTD high of 159.45 as the yen continues to struggle. Japan’s decision to release 80 million barrels from its strategic reserves as part of a coordinated IEA effort highlights policymakers’ focus on containing energy-driven inflation amid Middle East tensions, though the yen remains weighed down by Japan’s heavy reliance on imported energy. Business sentiment has softened slightly but remains expansionary, while higher oil prices and stagflation pressures are reinforcing expectations for more fiscal support. At the same time, strong demand at the latest 5-year JGB auction and softer rate-hike expectations have capped yields, keeping policy divergence and carry dynamics tilted against the yen, with markets still comfortable holding USDJPY despite intervention warnings.

The Australian dollar is cooling off today, giving back Wednesday’s gain that had taken the currency to its highest level against the Buck since June 2022. Still, expectations for a near-term RBA rate hike continue to provide support into dips. Consumer inflation expectations rose to 5.2% in March, the highest since July 2023, while CPI remains above the RBA’s target and risks remain skewed higher amid the recent oil supply shock. With inflation projected to stay elevated for longer and major banks now anticipating a 25bp hike next week, markets are pricing roughly a 70% chance of tightening, helping underpin AUD strength alongside strong commodity prices and a widening Australia–U.S. yield spread.