The euro is holding firm above 1.1600 as markets await today’s ECB decision, with a quarter-point rate hike widely expected after surging energy prices pushed Eurozone inflation further above target. The immediate focus will be on the ECB’s updated forecasts and whether President Lagarde signals that persistent inflation risks could justify additional tightening, although concerns about weak regional growth may limit how firmly she commits to further moves. Meanwhile, EURUSD remains sensitive to the US side of the equation, with today’s producer inflation report and Friday’s CPI release set to shape expectations for the Federal Reserve and the broader direction of the dollar.

The pound has extended its advance against the US dollar, supported primarily by broad dollar weakness and gradually firming expectations for additional Bank of England tightening later this year. UK housing data offered some encouragement, with the RICS survey reaching a five-month high and pointing to early signs of stabilization, although the recovery remains fragile. Markets expect the BoE to leave rates unchanged at next week’s meeting but are pricing a greater chance of incremental hikes into year-end. Near-term direction remains heavily dependent on upcoming US producer and consumer inflation data, which will shape expectations for the Federal Reserve after strong employment figures boosted the probability of another rate increase.

The yen has eased from a seven-month high against the dollar as traders lock in profits and turn cautious ahead of key US inflation data. The broader fundamental backdrop remains supportive, however, with markets fully pricing a Bank of Japan rate hike in September and assigning a strong probability to another move in December following hawkish signals from policymakers, solid wage growth and an upward revision to Japanese economic growth. Meanwhile, expectations for another Federal Reserve rate hike, elevated energy-driven inflation risks and escalating US-Iran tensions have helped the dollar recover modestly. Even so, the increasingly hawkish BoJ outlook should continue to underpin the yen and limit the scope for a sustained USDJPY rebound.

The Australian dollar has eased up a bit from recent highs as markets turn cautious ahead of key US inflation data, with the upcoming PPI and CPI reports set to shape expectations for next week’s Federal Reserve decision. Strong US employment data has revived the prospect of another Fed rate hike, supporting the US dollar, while escalating Middle East tensions have weighed on risk-sensitive currencies such as the Aussie. Nevertheless, downside pressure remains limited by an increasingly hawkish Reserve Bank of Australia outlook, after officials Sarah Hunter and Andrew Hauser signaled further tightening may be required if inflation remains persistent. This has encouraged expectations for additional RBA rate hikes and continues to provide underlying support for the Australian dollar.