US markets enter August with an awkward combination of macroeconomic signals. Economic momentum appears to be moderating, but the broader expansion is not clearly breaking down. Meanwhile, headline inflation has eased from its earlier peaks, yet elevated energy prices remain a constraint that could renew price pressure.

The Federal Reserve’s target range remains at 3.50% to 3.75%, with its next Federal Open Market Committee (FOMC) policy announcement scheduled for 16 September 2026. At the same time, Brent crude is trading near US$89.50 per barrel. What this means is that energy supply risks and geopolitical developments may continue to influence broader inflation expectations.

And that leaves markets with two questions at once. Is demand cooling enough to bring inflation back towards target, and can it do so without triggering a sharper economic slowdown?

August snapshot

01 Growth: Business activity and demand

August’s growth releases may help markets determine whether the US economy is undergoing a gradual cooling or experiencing a more pronounced loss of momentum.

Manufacturing and services indicators will provide an early reading of monthly business conditions. The second estimate of second-quarter gross domestic product (GDP) will then provide a broader test of whether the earlier growth picture requires revision.

But the central issue is not simply whether the economy continues to expand. It is whether that expansion is becoming more concentrated, whether momentum is broadening and whether restrictive interest rates are placing greater pressure on domestic demand.

02 Labour: Payrolls remain central to the policy debate

The US labour market remains a cornerstone of the Federal Reserve’s policy assessment because employment, wages and participation all feed into the inflation story.

Job creation has gradually moderated, which may have reduced some immediate wage pressure. Nevertheless, employment conditions remain firm enough to keep policymakers cautious about declaring the inflation fight complete.

The July non-farm payrolls (NFP) report may therefore help clarify whether labour demand is undergoing a controlled rebalancing or a more rapid weakening.

03 Inflation: The next test for the disinflation trend

Price stability remains the primary constraint on Federal Reserve flexibility, which means the inflation story is not finished simply because headline rates have moved below their previous peaks.

Markets are assessing whether the broader disinflation trend can continue while energy prices remain elevated. With Brent crude near US$89.50 per barrel, headline inflation risks have not disappeared. They have simply changed form.

August contains three major inflation reports, and together they may show whether price pressures are easing across consumers, producers and personal consumption.

04 Other factors: Policy, trade and geopolitics

Economic data will not be the only source of market direction during August. Policy communication, trade friction, corporate earnings and geopolitical risk may also influence asset pricing.

The FOMC meeting minutes, scheduled for release on 19 August, may provide further insight into the internal debate over slowing growth and persistent inflation. Meanwhile, Middle East energy developments and trade tariff policies could affect import costs and corporate margins.

Major US retail companies will also report earnings during the month, providing a real-time check on consumer demand, pricing power and household spending across different income tiers. That is where the macro story becomes a company story. Inflation may be easing in aggregate, while individual households and businesses continue to experience very different cost pressures.

Here is the puzzle at the centre of the foreign exchange market.

The Federal Reserve’s target range sits at 3.50% to 3.75%. The Reserve Bank of Australia’s cash rate is 4.35%. The Bank of Japan entered its late-July meeting with a policy rate of just 1.00%.

Those numbers may look like routine central bank settings. They are not. They represent three very different economic stories, three different inflation problems and three different incentives for global capital.

During July, those gaps helped support the Australian dollar, left the Japanese yen near multi-decade lows and turned AUD/JPY into one of the clearest expressions of the global rate divide.

Quick facts

Selected currency leaderboard

Strongest mover: Australian dollar

The Australian dollar was among July’s stronger major currencies, trading from around US$0.6900 to above US$0.70 during the latter part of the month.

At first glance, the explanation appears straightforward: Australia has a 4.35% cash rate. That is higher than the policy rate in several comparable economies, and higher relative yields can make a currency more attractive.

But that is only half the story. The other half is why the RBA has kept policy so restrictive. Inflation has slowed, but underlying price pressure remains above the central bank’s target range. That leaves the RBA with less flexibility than markets might otherwise expect.

The 11 August meeting is therefore not simply another rate decision: it is a test of whether the RBA believes the inflation problem is genuinely receding, or merely changing shape.

Risks and constraints

The Australian dollar’s yield advantage matters, but it does not operate in isolation.

China’s economy expanded by 4.3% over the year to the June quarter. That sounds resilient until the components are examined: industrial production rose by 5.3% over the year in June, retail sales increased by only 1.0%, and fixed-asset investment declined by 5.7% during the first half.

That gap matters because Australia is not equally exposed to every part of China’s economy. Strong factory production may support demand for some raw materials, whereas weak household consumption and property investment may point in the opposite direction.

So the Australian dollar enters August with two competing forces: Australia’s interest-rate settings are supportive, while China’s uneven recovery is not. A softer RBA assessment could reduce the currency’s rate advantage, and continued weakness in Chinese construction or commodity demand could add another constraint. Persistent Australian inflation, however, may keep restrictive policy expectations alive.

Weakest mover: Japanese yen

The yen remained under broad pressure during July, with USD/JPY trading near the 162.53 to 163.00 region. That level is remarkable, but the mechanism behind it is even more important.

The Bank of Japan raised its policy rate to 1.00% on 16 June. In another era, a Japanese rate increase might have been expected to support the yen; instead, the currency remained weak.

Why? Because foreign exchange markets do not compare a country’s current interest rate with its own past: they compare it with the rates available everywhere else. Japan’s 1.00% policy rate remains far below Australia’s 4.35% cash rate and the Federal Reserve’s 3.50% to 3.75% target range.

That gap continues to create an incentive for carry activity, where investors borrow in a lower-yielding currency and allocate capital towards higher-yielding markets.

Risks and constraints

The yen’s weakness may appear entrenched, but that does not make it permanent. Currency markets can change direction rapidly when heavily held positions begin to unwind.

A more restrictive signal from the Bank of Japan could force markets to reassess the expected pace of policy normalisation. Similarly, a decline in US yields could narrow Japan’s relative disadvantage, and a broader risk-off move could encourage investors to close yen-funded positions, potentially creating a sharp counter-move in the currency.

Official commentary is another factor: if yen weakness becomes rapid or disorderly, markets may become increasingly sensitive to statements from Japan’s Ministry of Finance. The lesson is simple: a weak currency can remain weak for a long time, until the assumptions supporting that weakness begin to change.

Most important cross: AUD/JPY

If there is one currency pair that captures the Asia-Pacific policy divide, it may be AUD/JPY.

On one side is Australia, with a 4.35% cash rate, commodity exposure and an inflation problem that may keep policy restrictive. On the other is Japan, with a 1.00% policy rate, heavy reliance on imported energy and a central bank moving cautiously towards normalisation.

The policy-rate difference is 3.35 percentage points. That is not a footnote: it is the central mechanism behind the cross.

What could shift the outlook?

The current logic supporting AUD/JPY is clear: Australia has the higher rate, Japan has the lower rate, and carry demand favours the Australian side of the cross. But markets rarely break because the obvious story becomes more obvious: they break when the obvious story stops working.

AUD/JPY may remain supported if the RBA maintains a restrictive stance and the Bank of Japan continues to move gradually. That support could weaken if Australian inflation falls faster than expected, the RBA adopts a less restrictive tone or Chinese commodity demand deteriorates.

A more hawkish Bank of Japan signal could support the yen, while falling US yields or a broader risk-off move could also trigger the unwinding of carry positions. The crucial question is not simply which central bank has the higher rate today, but which central bank may surprise markets tomorrow.