The euro has edged modestly higher, but overall trading is rangebound as investors reassess euro-area growth and policy amid rising uncertainty. Eurozone banks unexpectedly tightened lending in late 2025—especially in Germany and France—raising rates and collateral demands while rejecting more loans, threatening to slow the recovery into 2026. At the same time, trade and geopolitical risks, including higher U.S. tariffs, are weighing on corporate confidence, with the ECB viewing recent euro strength as driven more by mistrust of U.S. politics and external headwinds than strong domestic growth. Heading into this week’s meeting, the ECB is expected to keep rates on hold, and with sticky inflation, resilient labor markets, and weaker credit supply, policymakers are likely to stick to a steady approach—leaving rate differentials broadly stable and supporting the euro without signaling a major policy shift.

USDJPY climbed about 0.4% in Asia, extending its rally to a fourth day and hovering near a 1½-week high, with the move driven more by yen weakness than dollar strength. Markets are focused on domestic risks in Japan—especially the prospect of expanded fiscal spending and tax cuts—which is reviving concerns over debt-funded growth even as activity data improved and the BOJ shows rising urgency about rate hikes amid persistent above-target inflation. Still, policymakers continue to signal only gradual tightening, keeping US-Japan yield gaps wide, while a soft 10-year JGB auction and elevated yields highlight investor caution ahead of elections and potential stimulus. Overall, traders appear reluctant to push USDJPY much higher given election uncertainty, the risk of an earlier BOJ hike, and sensitivity from authorities to further yen weakness.

The Australian dollar is holding near multi-year highs after the surprise RBA rate hike, though the initial rally has cooled as markets shift into wait-and-see mode on whether more tightening follows. While the move briefly made AUD the top-performing G10 currency this year, policymakers struck a more cautious, data-dependent tone, prompting yields and AUDUSD to give back some gains as expectations for aggressive follow-up hikes were pared back. Strategists remain split between a “one-or-two-and-done” view and the risk of further tightening, but near term the Aussie retains a modest upside bias, with dips likely supported and a move toward 0.71–0.72 achievable if domestic data stay firm and the Fed begins gradual easing.