The euro is holding firm above 1.1600, supported by expectations that the ECB will raise rates again on Thursday as elevated energy costs keep inflation risks alive, while stronger-than-previously-estimated euro-area growth has given policymakers more room to tighten. With a quarter-point increase largely priced in, the currency’s next move will depend more on President Lagarde’s guidance and whether the ECB signals that another hike could follow in December. The backdrop is not uniformly positive, however, with weak German industrial production and rising political uncertainty tempering confidence in the region’s outlook. Meanwhile, solid US employment data and this week’s US inflation releases are supporting Fed tightening expectations, while renewed US-Iran tensions and the associated safe-haven demand for the dollar are limiting the euro’s upside.

Sterling has edged higher against the dollar, supported by Chancellor Healey’s commitment to fiscal discipline and proposals to boost private investment through regional devolution, regulatory reform and lower business costs. However, the measures largely extend existing policy and have provided only modest support, with investors still concerned about strained public finances, elevated borrowing costs and the difficult choices facing the government in its October budget. The pound continues to benefit from expectations that persistent inflation could keep the Bank of England in a relatively hawkish stance, although fragile growth and the prospect of tighter fiscal policy argue against an aggressive tightening cycle. Meanwhile, stronger US employment data and increased expectations for a September Federal Reserve rate hike are limiting GBPUSD gains, placing greater emphasis on this week’s US inflation releases and Friday’s UK GDP report.

The yen has rallied to its strongest level since February, driven by a sharp unwinding of short-yen and carry-trade positions as investors price in faster Bank of Japan tightening. Japanese real wages recorded their strongest annual increase since 2021, while second-quarter growth was revised higher, reinforcing expectations that the BoJ will raise rates next week and may continue tightening thereafter. Speculation over capital repatriation by Japanese investors and the authorities’ demonstrated willingness to support the currency through intervention have added momentum to the move. Meanwhile, broad dollar weakness ahead of key US inflation data has outweighed support from hawkish Fed expectations and geopolitical tensions, intensifying the decline in USDJPY.

The Australian dollar has steadied after four consecutive sessions of gains, with China’s broadly in-line trade figures offering little fresh direction despite continued strength in exports. Domestically, a sharp deterioration in consumer confidence has weighed on sentiment, reflecting concerns over elevated interest rates, rising fuel costs, housing-market weakness and job security. Nevertheless, expectations that persistent inflation could force the RBA to tighten policy again, alongside Australia’s recent stronger-than-expected growth data, continue to provide underlying support. The Aussie has also benefited from broader US dollar weakness, although stronger US employment data and rising expectations for a September Fed rate hike are limiting further upside ahead of this week’s key US inflation releases.