The euro remains under pressure as Lagarde’s cautious policy guidance tempers expectations for an October ECB hike, leaving relative interest rate expectations tilted in the Dollar’s favor. Her assessment that tight financial conditions are limiting the spread of higher energy costs into broader inflation has reduced the urgency for further tightening. Germany’s weaker-than-expected retail sales rebound adds to concerns over consumer demand, with spending recovering only partially from July’s sharp decline and remaining below year-earlier levels. Meanwhile, Europe’s exposure to elevated energy costs and political uncertainty in France continues to weigh on sentiment. Attention now turns to German and French inflation releases and incoming US data, which could either revive support for ECB tightening or reinforce the euro’s yield disadvantage.

The pound remains under pressure against the Dollar as elevated US Treasury yields and expectations of further Fed tightening overshadow support from prospective Bank of England rate increases. Sterling’s domestic backdrop is challenging, with higher energy costs adding to inflation risks while weak labor demand and sluggish private sector momentum limit the economy’s ability to absorb tighter policy. BoE officials remain divided over the need to raise rates, with Alan Taylor arguing that evidence of broader inflation persistence is still insufficient. Meanwhile, weaker mortgage approvals highlight pressure from borrowing costs, and uncertainty over tax and spending decisions ahead of the October Budget adds another constraint on sentiment. Together, these forces leave sterling caught between inflation concerns that support higher rates and growth risks that undermine their currency benefit.

The yen is finding support from increasingly forceful intervention warnings out of Tokyo, with renewed coordination between Japanese and US officials making investors more cautious about selling the currency. The Bank of Japan’s continued policy normalization and rising Japanese yields are also providing support, while comments from Fed President Williams pushing back against the need for immediate further tightening have eased some pressure from the Dollar. Nevertheless, elevated US yields remain a headwind, leaving the yen’s recovery dependent on both the credibility of official intervention threats and the outlook for relative interest rates. Upcoming US inflation and employment data will be key to whether that recovery can extend.

The Australian dollar is finding some support from persistent domestic inflation, with August CPI accelerating to 4% annually from 3.5%, reinforcing the case for the RBA to keep policy restrictive after its fourth rate increase this year took the cash rate to 4.6%. However, while Governor Bullock left further tightening on the table, her emphasis on allowing previous increases time to work has tempered expectations of an uninterrupted hiking cycle, limiting the Aussie’s benefit from higher rates. Against this backdrop, the currency’s modest recovery remains vulnerable, with attention turning to US PCE inflation for the next steer on Federal Reserve policy and the US dollar.