The euro remains under pressure as elevated US Treasury yields support the dollar, despite softer US inflation reducing expectations for an immediate Fed rate hike. Longer-term borrowing costs remain high, while hawkish Fed commentary keeps further tightening in play. On the European side, Lagarde’s call for a measured response to energy-driven inflation has tempered expectations for aggressive ECB action, particularly as higher bond yields already threaten growth and there is little evidence of broader second-round price pressures. We see this relative policy backdrop continuing to weigh on the euro, with US jobless claims, manufacturing data and Fed commentary the next catalysts for shifts in dollar demand.

Sterling is edging lower against the dollar as hawkish Federal Reserve signals temper the relief from softer US PCE inflation, with Kashkari continuing to favor further rate increases. The UK backdrop has nevertheless improved, with an upward revision to second-quarter growth reinforcing expectations for a Bank of England hike and helping the pound outperform the euro. However, Alan Taylor’s view that tightening is not yet compelling without clearer evidence of energy inflation spreading through the economy highlights uncertainty over how much tightening the BoE will ultimately deliver. US jobless claims and further Fed commentary are the next catalysts for dollar sentiment and relative rate expectations.

The yen remains under pressure as elevated US Treasury yields and broad dollar demand outweigh increasingly hawkish signals from the Bank of Japan. Softer US PCE inflation has tempered expectations for another Fed hike in October, but has provided little relief from the global bond sell-off as energy-related inflation risks and fiscal concerns keep yields elevated. Meanwhile, the BoJ’s September Summary of Opinions showed some policymakers favoring faster tightening, while stronger Japanese business confidence reinforced the case for further rate increases. However, uncertainty over an immediate follow-up hike in October has limited support for the yen, leaving the US yield backdrop as the dominant near-term driver.

The Australian dollar is outperforming most major peers as elevated domestic interest rates provide support, following the RBA’s fourth hike of the year to 4.60%. Persistent inflation keeps further tightening on the table, although Governor Bullock’s more cautious tone has encouraged some analysts to anticipate an extended pause as earlier hikes work through the economy. RBA Australia’s sharply narrower August trade surplus of A$495 million adds a softer domestic signal, while broad US dollar strength and elevated Treasury yields continue to limit gains against the greenback. Attention now turns to September’s US ISM manufacturing report, particularly its activity and prices components, for the next steer on Federal Reserve expectations and the direction of the dollar.