The euro has found modest support as the US dollar eases back following last week’s softer US employment data and a Federal Reserve meeting that, while still signaling inflation concerns, highlighted considerable uncertainty over the policy outlook. Although markets continue to price a meaningful chance of another Fed rate hike later this year, expectations for an aggressive tightening cycle have softened, taking some momentum out of the dollar. At the same time, the euro has drawn support from a repricing of European Central Bank expectations, with markets once again leaning toward additional ECB tightening this year as higher energy prices and geopolitical risks threaten to complicate the inflation outlook, helping lift Eurozone bond yields relative to US Treasuries. Even so, gains in the single currency remain measured as softer recent Eurozone inflation data tempers the ECB’s tightening outlook, while renewed US-Iran tensions and the resulting safe-haven demand for the dollar continue to act as an important headwind for EURUSD. Investors are now looking to the ECB meeting accounts and incoming US economic data for fresh direction.

Sterling has been underpinned by a combination of easing domestic political uncertainty and resilient Bank of England rate expectations, although those gains have been tempered by renewed demand for the US Dollar on escalating Middle East tensions. With Andy Burnham widely expected to succeed Keir Starmer as Prime Minister later this month, markets have largely welcomed the prospect of a swift political transition, shifting their attention back toward the UK’s economic outlook and fiscal policy. At the same time, the BoE’s relatively hawkish stance, with policymakers continuing to express concern over sticky services inflation and markets still pricing in a reasonable chance of another rate hike before year-end, has helped support the pound. However, Cable’s upside has been constrained as fresh US strikes on Iran and the threat of further regional escalation have revived safe-haven demand for the Greenback. Meanwhile, the minutes from the Federal Reserve’s June meeting reinforced the view of a divided central bank, with policymakers split between keeping rates near current levels and tightening further should inflation remain persistent, leaving investors focused on incoming US inflation data for clearer direction on the Fed’s next move.

The Yen remains under pressure as the wide interest rate differential between Japan and the United States continues to favor the US Dollar, even after USDJPY pulled back from fresh multi-decade highs above 163.00. While the Bank of Japan remains committed to gradually normalizing policy following its June rate hike, markets continue to see its tightening cycle lagging well behind the Federal Reserve, where expectations for further policy restraint remain elevated despite recent signs of softer US economic momentum. At the same time, renewed fighting between the US and Iran has driven oil prices higher, creating an additional headwind for the import-dependent Japanese economy by worsening its terms of trade and weighing on the Yen. Traders also remain highly alert to the risk of Japanese currency intervention, with USDJPY still trading well above the levels that previously prompted Tokyo to step into the market. Although officials have refrained from issuing stronger verbal warnings in recent days, the absence of rhetoric has done little to diminish speculation that authorities could intervene again if exchange rate moves become excessively volatile, particularly as next week’s US inflation data has the potential to reshape Fed expectations and narrow the yield advantage that has fueled the Dollar’s rally against the Yen.

The Australian dollar is trading with a firmer tone, supported primarily by a softer US dollar and an improvement in broader risk appetite, although gains remain constrained by elevated geopolitical tensions in the Middle East. While the latest FOMC minutes reinforced the Federal Reserve’s concern over upside inflation risks and kept the prospect of further policy tightening alive, the greenback has struggled to capitalize, allowing the Aussie to recover. Domestically, expectations for additional Reserve Bank of Australia tightening have received fresh support after Assistant Governor Sarah Hunter reiterated that policymakers remain prepared to act if necessary to ensure inflation returns sustainably to target, despite recent moderation in monthly inflation readings. External developments in China also remain pivotal for the Australian dollar, with stronger-than-expected producer price inflation pointing to improving industrial pricing power, even as softer consumer inflation underscores lingering weakness in domestic demand, leaving the overall backdrop for Australia’s largest trading partner mixed.