The euro remains well supported near three-month highs against the dollar, though the latest advance has been driven more by broad US currency weakness than by a marked improvement in euro-area fundamentals. Investor concern over the US fiscal outlook and the Treasury’s decision to expand long-dated bond buybacks has weighed on the greenback, while the ECB’s decision to keep rates unchanged and elevated euro-area inflation have preserved expectations that policy will remain restrictive. The euro-area growth backdrop is still subdued, however, with soft domestic demand, slowing job creation and lingering uncertainty from higher energy prices limiting the case for sustained euro strength. Near-term direction should therefore hinge heavily on US developments, particularly Fed Chair Warsh’s Jackson Hole speech, upcoming inflation data and details of new sanctions on Iran, with a hawkish Fed message or renewed geopolitical demand for the dollar posing the clearest downside risks to EURUSD.

The pound remains well supported near six-month highs against the dollar, although the advance continues to reflect broad USD weakness more than a decisive improvement in UK fundamentals. The greenback has been pressured by reduced expectations for an imminent Fed rate hike, falling Treasury yields and concerns that expanded US debt buybacks amount to indirect yield suppression. Domestically, sterling is benefiting from the UK economy’s relative resilience and July inflation rising to 2.9%, which has kept one Bank of England rate increase priced by year-end. However, softer wage growth, a cooling labor market and a 0.5% fall in July retail sales argue against an aggressive BoE tightening cycle. This leaves the pound’s outlook constructive but vulnerable if rising oil prices intensify global risk aversion, support the safe-haven dollar or further squeeze UK household spending.

The yen has strengthened modestly, as firmer Japanese inflation reinforced expectations that the Bank of Japan could raise rates again in September. July core CPI accelerated to 1.8% year-on-year from 1.6%, while the measure excluding fresh food and energy rose to 1.9%, suggesting that underlying price pressures are broadening and supporting Governor Ueda’s push toward further policy normalization. Markets are now assigning a high probability to a 25-basis-point increase to 1.25% at the September meeting. The yen has also benefited from a softer US dollar and lower Treasury yields after the US Treasury unexpectedly doubled planned long-dated bond buybacks, although still-elevated US yields and renewed Middle East tensions are limiting the scale of the move.

The Australian Dollar has pushed higher, although the move has been driven primarily by broad US Dollar weakness after the Treasury’s expanded long-dated bond-buyback plans raised concerns about intervention in the bond market and the credibility of US fiscal policy. Domestically, the backdrop is less supportive: Australian employment unexpectedly fell by 15,800 in July, unemployment rose to 4.5%, and hours worked declined, cooling expectations for another near-term RBA rate hike even as inflation remains above target. The RBA has kept rates at 4.35% after delivering 75 basis points of tightening this year, leaving the Aussie sensitive to Tuesday’s meeting minutes and Thursday’s July CPI report for guidance on whether further tightening remains likely. Escalating US-Iran tensions could meanwhile limit AUD gains by encouraging safe-haven demand and weakening broader risk appetite.