The euro has remained well supported on the fundamentals, with recent Eurozone inflation data reinforcing expectations that the ECB will continue its gradual normalization path. Headline CPI accelerated to 3.2% in May, its highest level in more than two-and-a-half years, while core inflation rose to 2.5% and services inflation climbed to 3.5%, highlighting increasingly broad-based price pressures across the economy. The data has effectively cemented market expectations for another 25bp ECB rate hike next week, helping underpin demand for the single currency despite ongoing geopolitical uncertainty. At the same time, Eurozone growth dynamics have shown signs of stabilization, reducing concerns about an aggressive easing cycle and supporting a widening divergence with expectations for slower US economic momentum. Nevertheless, EURUSD has struggled to extend gains beyond the mid-1.16s as the dollar remains supported by safe-haven demand amid heightened Middle East tensions and ahead of key US labor market data, with investors looking to the latest Nonfarm Payrolls report for clues on the Federal Reserve’s policy outlook.

The Yen remains under pressure, with USDJPY hovering near the closely watched 160.00 level as widening US-Japan yield differentials continue to outweigh improving domestic fundamentals. While stronger-than-expected wage growth has reinforced expectations that the Bank of Japan will continue normalizing policy, and markets remain alert to the risk of official intervention should Yen weakness become disorderly, these supportive factors have so far failed to generate a sustained recovery. Instead, the Dollar has remained underpinned by resilient US economic data and expectations that the Federal Reserve will keep rates restrictive for longer, preserving the yield advantage in favor of the USD. At the same time, heightened geopolitical uncertainty in the Middle East has boosted demand for Dollar liquidity, further limiting Yen gains despite its traditional safe-haven status. As a result, the market continues to test Japan’s tolerance for currency weakness, with intervention rhetoric from Tokyo helping to slow, but not reverse, the broader trend of Yen depreciation.

The Australian Dollar remains broadly supported by a still-resilient domestic economy and the Reserve Bank of Australia’s increasingly “higher-for-longer” policy stance, although gains have recently stalled near the 0.7200 area. While headline inflation has continued to ease, underlying price pressures remain sticky, with trimmed mean inflation still running above the RBA’s target range, reinforcing Governor Bullock’s message that policymakers will do whatever is necessary to restore price stability. Markets continue to price a prolonged period of restrictive policy, with the cash rate held at 4.35% and expectations for additional tightening still lingering. Domestic growth has softened from earlier levels and labor market conditions are gradually cooling, but activity remains comparatively robust relative to many G10 peers. External factors have also become increasingly important for the Aussie, with swings in global risk sentiment and developments in the Middle East driving near-term price action. Recent optimism around a potential easing of tensions between the US and Iran weighed on the US Dollar and supported risk-sensitive currencies, though renewed uncertainty surrounding negotiations has helped underpin safe-haven demand for the Greenback. Meanwhile, China remains more of a stabilizing influence than a growth engine for Australia, with improving business surveys helping offset softer activity data and ongoing concerns around domestic demand. Overall, the fundamental backdrop remains constructive for the Australian Dollar, supported by a hawkish RBA, relatively firm domestic conditions, and investor positioning that continues to favor the currency, although further upside will likely require either a renewed improvement in global risk appetite or another leg lower in the US Dollar.