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Brown Brothers Harriman’s (BBH) Elias Haddad reports the Australian Dollar is underperforming as bond yields fall after Q2 wage growth matched expectations. Haddad argues this outcome will keep the RBA on hold, with private sector wage gains at a four‑year low. Futures still price a possible final hike, but he sees risks skewed toward an extended pause despite supportive carry and commodity exposure.

AUD pressured as wage data cools

"AUD is underperforming across the board, and Australian bond yields are lower. Australia Q2 wage growth matched consensus and will keep the RBA sidelined."

"Wages rose 0.8% q/q for a third straight quarter to be 3.2% y/y vs. 3.2% in Q1. Annual wage growth in Q2 was softer than the RBA’s projection of 3.3% and underlying private sector pay pressures were even more subdued."

"Private sector wages growth eased to a four-year low at 3.1% y/y vs. 3.2% in Q1, while public sector wages growth held at 3.4% y/y for a second straight quarter."

"RBA cash rate futures continue to imply 60% odds of one final 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive."

"Still, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds."

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• EUR/JPY trades around 184.70 on Wednesday, virtually unchanged on the day.
• Expectations of higher interest rates in Japan support the Japanese Yen, while fiscal concerns limit its appreciation.
• Persistently elevated Eurozone inflation also strengthens expectations of further monetary tightening in Europe.

EUR/JPY trades around 184.70 on Wednesday at the time of writing, edging 0.03% lower on the day. The pair struggles to find a clear direction as the Japanese Yen (JPY) benefits from growing expectations of another interest-rate hike by the Bank of Japan (BoJ), while the Euro (EUR) remains supported by prospects of further monetary tightening from the European Central Bank (ECB).

On the Japanese side, investors are increasing their bets on another BoJ rate hike in the coming months. According to Reuters, the Japanese central bank is considering raising interest rates as soon as September, while overnight index swaps are pricing in around an 80% chance of such a move. These expectations support the Japanese Yen and limit EUR/JPY's upside potential for now.

Investors now await the release of Japan's National Consumer Price Index (CPI) on Friday. Inflation remaining persistently above the BoJ's 2% target could reinforce expectations of further monetary tightening and strengthen the Japanese Yen.

However, concerns surrounding Japan's public finances are limiting the currency's appreciation. Japanese Prime Minister Sanae Takaichi has proposed cutting the consumption tax on food to 1% for two years without yet identifying an alternative source of revenue to offset the measure. The proposal fuels concerns about Japan's fiscal trajectory and represents a potential headwind for the Japanese Yen.

Meanwhile, the Euro retains some support following the latest Eurozone inflation data. The Harmonized Index of Consumer Prices (HICP) rose by 2.9% YoY in July, up from 2.8% in June, matching the preliminary estimate and remaining above the ECB's 2% target. Core inflation also accelerated to 2.5% from 2.4%.

The figures reinforce expectations that the ECB will continue its rate-hiking cycle. Markets are now pricing in a 96% chance of a 25-basis-point rate increase in September according to the ECB Watch tool, which would bring the policy rate to 2.5%.

ECB Chief Economist Philip Lane said on Tuesday that Eurozone inflation, at around 3%, remains too high, even if the level appears modest compared with previous peaks. His comments, combined with the latest inflation figures, help the Euro withstand the strength of the Japanese Yen and keep EUR/JPY near 184.70.

BoJ path repriced as Standard Chartered flags earlier hikes and persistent Yen risks

Analysts at Standard Chartered have brought forward their expectations for Bank of Japan tightening, now looking for the BoJ "to hike by 25bps on 18 September from October previously." They also anticipate a more extended cycle, saying "we now expect two more 25bps hikes after September, in Q1- and Q3-2027, from 25bps hikes in October and Q2-2027," which implies "a higher terminal rate of 1.75% in this rate-hike cycle from 1.5% previously." Even so, they caution that "we doubt the BoJ can ‘out-hawk’ the market, which is pricing in a terminal rate of c.2.0% by end-2027."

On the currency side, Standard Chartered reiterates that "we do not rule out further FX intervention in the interim as USD/JPY trades close to 160; we still see USD/JPY at 158 by end-Q3 and 160 by end-Q4 as yield-insensitive capital outflows weigh on the JPY." They note that "the recent Japan-US coordination to stabilise the JPY highlighted a shared concern about the inflationary consequences of excessive currency weakness," underscoring the policy sensitivity around the exchange rate.

The bank also flags several potential challenges to its baseline, warning that "risks to our view include any further hawkish BoJ surprises in the near term, signs of repatriation by local investors and PM Takaichi pivoting away from her preference for dovish policy to boost growth."

Commerzbank FX analysts Norman Liebke and Michael Pfister see the Brazilian Real (BRL) supported by the Brazilian Central Bank’s (BCB) hawkish stance and still-elevated real interest rates. They expect USD/BRL to stay under pressure ahead of the October presidential election as markets price political risk, before appreciating again with forecasts of 5.20 by year-end 2026 and 4.80 by end-2027.

Real pressured then seen appreciating

"As last year, the Brazilian Central Bank’s (BCB) hawkish stance has contributed to the real’s strong performance this year."

"With energy prices remaining high, market participants now expect the benchmark interest rate to be around 14% by year-end, which is in line with the current level."

"Despite the high real interest rate, the BCB has successfully convinced the market that there will be no more than one additional rate cut this year."

"In our view, the real is likely to remain under pressure against the US dollar until the presidential election in October, and inflation and interest rate trends will not resume their dominant role in BRL performance until after the election."

"Given the Brazilian central bank’s relatively hawkish stance, the real is likely to continue appreciating, so that USD/BRL should stand at 5.20 by the end of the year, once political risks have subsided, and at 4.80 by the end of 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/GBP appreciated for the fifth day in a row, reaching session highs above 0.8550.
• Eurozone final HICP figures confirm that price pressures accelerated in July.
• In the UK, hotter CPI and soft employment figures have left the Pound on the defensive.

The Euro (EUR) trades higher against the British Pound (GBP) on Wednesday, on track for a five-day winning streak, and received additional support after Eurozone final inflation figures confirmed higher price pressures in July. The EUR/GBP has reached session highs at 0.8560 after bouncing from last week’s lows, at 0.8530.

Eurozone’s final Harmonised Index of Consumer Prices (HICP) confirmed preliminary data pointing to an acceleration to a 2.9% year-over-year (Y-o-Y) rate in July, from 2.8% in June. Likewise, the Core HICP ticked up to a 2.5% Y-o-Y growth rate in July from 2.4% in the previous year.

Month-over month, the HICP bounced up to a 0.2% gain after a 0.1% contraction in June, while the core HICP remained flat for the second consecutive month.

These figures strengthen the case for an interest rate hike by the European Central Bank (ECB) in September, particularly after ECB official and Finnish Central Bank Governor Olli Rehn reiterated earlier on Wednesday that “keeping inflation expectations anchored is essential”

UK data shows hotter inflation and a softer labour market

Earlier on the day, UK Consumer Price Index (CPI) data revealed that inflation accelerated to a 0.3% rate in July, from 0.1% in May and 2.9% year-over-year (Y-o-Y) from 2.6% in the previous month, in line with market expectations. 

The Core CPI grew at a 2.6% Y-o-Y rate, unchanged from the previous month, against the market consensus for a slowdown to a 2.5% yearly rate. The impact of these figures on the Pound, however, was minimal.

These figures follow a mixed UK employment report which put the Pound under pressure on Monday. The ILO Unemployment Rate remained steady against expectations of a slight decline, employment growth slowed down, the number of jobless claimants declined unexpectedly, and wage growth accelerated after having remained steady over the previous three months.

Silver prices (XAG/USD) fell on Wednesday, according to FXStreet data. Silver trades at $63.10 per troy ounce, down 0.38% from the $63.35 it cost on Tuesday.

Silver prices have decreased by 11.23% since the beginning of the year.

The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, stood at 69.02 on Wednesday, up from 68.42 on Tuesday.

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Deutsche Bank’s Chief United Kingdom (UK) Economist Sanjay Raja notes that UK inflation data for July broadly matched expectations, with headline Consumer Price Index (CPI) rising and core CPI steady. He highlights energy price increases from the Ofgem Price Cap and base effects as drivers, while food and services inflation eased. Raja nonetheless sees further upside in CPI later this year and warns of persistent risks for the MPC.

Inflation outlook and MPC stance

"UK inflation broadly met expectations today. Headline CPI rose to 2.9% y/y (June: 2.6%). Core CPI stayed put at 2.6% y/y. Services CPI slowed to 3.4% y/y (June: 3.6%)."

"What happened in July? Energy prices – as expected – rose on the back of the hefty rise in the Ofgem Price Cap. Elsewhere, base effects played their role in pushing inflation a little higher."

"There was some good news though. Food price inflation dropped to its lowest rate since late 2021. Services CPI also fell to its lowest rate in three months. Core goods pricing remains constrained, with summer discounting continuing. And promotional activity continues to keep prices competitive."

"Looking ahead, some further upside to inflation looks likely. Energy prices look poised to rise further. Services inflation, we think, will also edge up. We continue to see CPI peaking near 3% y/y later this year. Risks are skewed to the upside."

"For the MPC, there will be some food for thought, however. The Bank’s suite of core services measures all ticked up – highlighting some uneasiness in price momentum. Energy inflation also remains volatile with tensions in the Middle East ongoing. Further rises in the Ofgem Price Cap can’t be ruled out."

"For now, combined with yesterday’s labour market report, the MPC can remain on the sidelines. But don’t expect any change in sentiment. Uncertainty around the outlook remains. And we expect the MPC to remain cautious for the time being."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• Euro holds firm as Eurozone annual inflation reached 2.9% in July, exceeding the ECB's 2% target.
• ECB Chief Economist Philip Lane warned that war with Iran will likely keep 2026 inflation around 3%.
• Traders remain cautious ahead of the Federal Reserve’s July Meeting Minutes for guidance on future interest rates.

EUR/USD rises after registering minor losses in the previous day, trading around 1.1600 during the European hours on Wednesday. The pair holds ground as the Euro (EUR) remains stronger following the release of Eurozone Harmonized Index of Consumer Prices (HICP) data for July. Eurozone annual inflation rose to 2.9% in July from 2.8% in June, matching preliminary estimates and staying above the European Central Bank's 2.0% target. Core inflation, excluding food and energy, also ticked up to 2.5% from 2.4%.

El Niño risks keep ECB hawkish as Eurozone inflation seen near 3%

Analysts at ING argue that the recent surge in energy costs is reinforcing the European Central Bank’s hawkish bias, noting that “high energy prices also maintain the hawkish undercurrent at the European Central Bank.” They highlight comments from ECB Chief Economist Philip Lane, who warned that Eurozone inflation could remain “at 3.0% all year and perhaps staying high next year as well,” with the El Niño weather event expected to “drive food inflation globally” and add another layer of upside risk to the price outlook.

Moreover, the EUR/USD pair rises as the US Dollar (USD) loses ground on easing expectations of a US interest rate hike next month. Recent economic data showed that US Retail Sales dropped in July for the first time in nine months, compounding concerns after unexpected job losses last month and tame CPI inflation figures.

According to the CME FedWatch tool, traders now price in just a 32.8% chance of a rate hike at the Fed’s September meeting, down significantly from 51.2% a month earlier. Traders are now turning their focus to the upcoming release of the Federal Reserve’s July Meeting Minutes for further market direction.

Dollar slide adds to already strong domestic inflation pressures

Strategists at BNY Mellon caution that the adjustment underway in the Dollar could unfold faster than many expect, noting that “that timeline could prove conservative.” They point out that “the Dollar is already weakening in nominal terms, introducing some pass-through inflation risk, even if the US is less exposed to this channel than more export-dependent economies.” This prospective external impulse, BNY adds, “comes on top of uniquely strong domestic inflation pressures from capital expenditure and demand,” reinforcing their view that the current Dollar move is occurring against a backdrop of already elevated underlying price dynamics.

ING’s commodities team highlights that Copper prices on the LME have retreated sharply, falling below $14,000/t as a significant increase in on-warrant inventories eases the previous supply squeeze. Spreads have narrowed in response, while speculative net long Copper positions have been trimmed, signalling a moderation in bullish sentiment over the coming days and weeks.

Rising LME stocks pressure copper

"LME copper prices fell below $14,000/t yesterday, posting their sharpest decline since 23 July, as fresh deliveries into LME warehouses eased a prolonged supply squeeze."

"On-warrant copper inventories rose by 20,025 tonnes, the largest daily increase since 7 April, extending gains for a sixth consecutive session to 123,100 tonnes."

"The increase in stocks helped alleviate tightness after inventories had been depleted by strong shipments to the US, driven by tariff-related arbitrage opportunities."

"Reflecting the improved supply situation, the LME cash/3M copper spread narrowed to $248/t, while the tom-next spread also retreated after recently reaching levels last seen during the 2021 copper squeeze."

"The latest COTR data showed speculators cut net long copper positions by 6,340 lots to 53,914 lots, ending a two-week streak of increases despite higher copper prices."

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MUFG’s Derek Halpenny highlights how elevated US Treasury yields and rising mortgage rates are beginning to weigh on the US housing market, with Housing Starts and Pending Home Sales softening. He notes that the July FOMC meeting and Chair Warsh’s communication have driven a rise in real long-term yields, while upcoming FOMC Minutes may have limited FX impact unless volatility broadens.

Yields, housing and FOMC minutes

"We mentioned here yesterday that there was zero appetite in the US for tackling the worsening fiscal outlook and the danger is that yields move to levels that trigger greater economic weakness and trigger asset price corrections as financial conditions tighten excessively."

"But the 30-year mortgage rate is now close to a one-year high and at 6.75% has a ways to go before retesting the 2023 high of over 8%. Pending home sales data for July saw a 2.3% MoM drop after a 4.8% fall in June and affordability is starting to have an impact. If UST bond yields remains at multi-decade highs US households will start to notice quickly."

"While the fiscal outlook and inflation concerns are ever present, when it comes to the specific trigger to the latest sell-off it was the FOMC meeting on 29th July. As stated here, breakevens do not indicate an upturn in inflation concerns and measures of fiscal risks have been relatively stable. So the rise in real long-term yields reflects the term premium and specifically the greater uncertainty over monetary policy fuelled by unclear communication from Chair Warsh."

"We’d expect limited FX fallout until we start to see more compelling evidence that higher rates are transmitting to a broader volatility spike."

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Standard Chartered strategists have revised its Bank of Japan (BoJ) rate outlook, bringing forward its expected 25bps hike from October to September and raising its terminal rate forecast to 1.75% from 1.50% previously. They expect two additional hikes in 2027, while noting that FX intervention risks remain as USD/JPY trades near 160. Despite the recent pullback toward 159, they maintain their USD/JPY targets at 158 by end-Q3 and 160 by end-Q4.

BoJ hiking path reshaped

"We now expect the Bank of Japan (BoJ) to hike by 25bps on 18 September from October previously."

"We now expect two more 25bps hikes after September, in Q1- and Q3-2027, from 25bps hikes in October and Q2-2027."

"As a result, we expect a higher terminal rate of 1.75% in this rate-hike cycle from 1.5% previously."

"We now see 25bps hikes in September (vs October prior), and in Q1- and Q3-2027 (vs only in Q2-2027 prior) Our revised expectation implies an additional 25bps hike this cycle, to a terminal rate of 1.75% (1.5% prior) We see earlier and more rate hikes, but at a gradual pace given slow growth and a higher fiscal burden."

"We doubt the BoJ can ‘out-hawk’ the market, which is pricing in a terminal rate of c.2.0% by end-2027."

"We do not rule out further FX intervention in the interim as USD/JPY trades close to 160; we still see USD/JPY at 158 by end-Q3 and 160 by end-Q4 as yield-insensitive capital outflows weigh on the JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)