The euro has recovered some ground as the dollar softens, but the fundamental backdrop remains challenging. France’s fiscal and political uncertainty is weighing on sentiment, with doubts over the government’s ability to deliver budget savings ahead of the presidential election raising concerns about sovereign debt pressures and potentially constraining further ECB tightening. Meanwhile, a widening US yield advantage continues to favor the dollar, reinforced by Fed minutes highlighting persistent inflation risks and hawkish commentary pointing to further tightening. Attention now turns to US jobless claims and additional Fed remarks, while any moderation in expectations for US rate increases could give the euro some breathing room.

The pound remains under pressure into Thursday as a hawkish Federal Reserve outlook, elevated US bond yields and persistent geopolitical uncertainty underpin demand for the dollar. Expectations of tighter Bank of England policy offer sterling some support, but have so far been insufficient to offset the broader dollar strength. The key fundamental tension is whether UK rate expectations can provide a stronger cushion while US yields and demand for safety continue to favor the dollar, leaving sterling struggling to establish a sustained recovery.

The yen’s fundamental outlook remains tied to the timing of further Bank of Japan tightening, with the latest regional report reinforcing the case for additional rate increases while highlighting risks to the wage outlook. Unchanged assessments for seven of nine regions, resilient consumption, strong investment appetite and AI-related production demand suggest the economy continues to hold up. Meanwhile, sustained wage increases and more frequent price rises point to persistent inflation pressure, amplified by the weak yen and costs associated with the Middle East conflict. However, warnings that firms unable to pass on higher costs could restrain wage increases complicate the policy outlook. For the yen, the key question is whether these inflation pressures translate into faster tightening, with firmer expectations for rate increases offering potential support for the currency.

The Australian dollar remains under pressure into Thursday as hawkish Fed minutes reinforce expectations for further US tightening this year, supporting the greenback despite reduced odds of an October hike. Persistent US inflation concerns, echoed in hawkish Fed commentary, are keeping the policy outlook restrictive and weighing on the Aussie. Domestically, the possibility of another RBA increase offers some support, with former board member Ian Harper describing a November move as plausible, though markets still favor a hold. The balance leaves the currency sensitive to incoming inflation and employment data, with a stronger recovery likely to require either firmer expectations for Australian tightening or a softening in the US rate outlook.