As of 27 August 2026, foreign exchange markets are heading into September with interest-rate differentials, inflation and central bank expectations pulling major currencies in different directions.

The Federal Reserve (Fed) target range sits at 3.50% to 3.75%, the Reserve Bank of Australia (RBA) cash rate is 4.35%, the Bank of Japan (BOJ) is guiding its overnight rate at around 1.00% and the European Central Bank (ECB) deposit facility rate is 2.25%.

Those central bank settings reflect different growth and inflation conditions, which in turn create different incentives for global capital as markets reassess where policy may move next.

Through August, that policy divide helped support the Australian dollar, while the euro and British pound also gained against the US dollar. The Japanese yen remained under pressure, leaving the regional rate divide as an important part of the FX outlook heading into September.

Quick facts

Selected currency leaderboard

Strongest mover: Australian dollar

The Australian dollar was the strongest of this selected group through most of August, gaining about 1.9% against the US dollar through 26 August, with AUD/USD trading around 0.7183 at 4 pm AEST on 27 August.

Australia’s 4.35% cash rate remains above the Federal Reserve’s 3.50% to 3.75% target range and well above the ECB and BOJ policy settings, giving the Australian dollar a relative yield advantage when other market conditions are supportive.

The reason that advantage remains in place is equally important. The RBA has said inflation remains too high and has raised the cash rate three times in 2026, leaving the Australian dollar sensitive to any change in the Bank’s assessment of price pressures, growth and household demand.

That puts the 29 September RBA decision firmly in focus, as markets assess whether policymakers see the existing tightening as sufficient or whether inflation risks continue to justify a restrictive stance.

Risks and constraints

The Australian dollar’s yield advantage remains important, although it sits alongside a broader set of domestic and regional growth risks.

Asia-Pacific growth remains an important external input for the Australian dollar. The RBA has noted that activity among Australia’s major trading partners has remained resilient, supported in part by AI-related investment, while commodity and energy prices remain volatile.

That distinction matters because Australia is not equally exposed to every part of regional growth. Stronger industrial activity may support demand for some commodity exports, while weaker household spending or property investment could offset part of that support.

The Australian dollar therefore enters September with competing forces. Relatively high domestic rates remain supportive, while softer Australian growth or weaker regional commodity demand could reduce that advantage. Persistent inflation may keep restrictive RBA expectations in place, making incoming GDP, labour and CPI data important for the next phase of AUD pricing.

Weakest mover: Japanese yen

The yen remained under pressure through August, with USD/JPY trading around 159.24 on 27 August compared with 157.43 at the end of July, leaving the yen about 1.1% weaker against the US dollar over that period.

The Bank of Japan raised its policy rate to around 1.00% in June and kept that setting in place at its July meeting, but Japan’s yield gap with several major economies remains wide enough to constrain the currency.

Foreign exchange markets are focused on that relative gap rather than Japan’s rate in isolation. The BOJ’s 1.00% policy setting remains well below Australia’s 4.35% cash rate and the Federal Reserve’s 3.50% to 3.75% target range, preserving an incentive to seek higher yields elsewhere.

That backdrop can continue to support carry activity, where lower-yielding currencies are used to fund positions in higher-yielding markets, while also leaving the yen sensitive to abrupt changes in risk appetite and global bond yields.

Risks and constraints

The yen’s weakness has been persistent, but the outlook can change quickly if relative rate expectations shift or heavily held carry positions begin to unwind.

A more restrictive BOJ signal could lead markets to reassess the expected pace of policy normalisation, while a decline in US yields could narrow Japan’s relative disadvantage. A broader risk-off move may also encourage investors to reduce yen-funded positions, potentially increasing volatility across JPY crosses.

Official commentary remains another variable, particularly if yen weakness becomes rapid or disorderly and markets become more sensitive to statements from Japan’s Ministry of Finance. The key question for September is whether the rate and risk assumptions supporting the current yield gap continue to hold.

Most important cross: AUD/USD

While AUD/JPY captured the Australia-Japan rate divide in July, AUD/USD may provide a clearer September read on how Australian policy expectations compare with the next move in US rates.

Australia enters the month with a 4.35% cash rate and an RBA still focused on inflation, while the United States has a Federal Reserve target range of 3.50% to 3.75% and a September calendar packed with labour, inflation and policy events.

That leaves Australia’s cash rate 0.60 to 0.85 percentage points above the Federal Reserve target range, making the relative-rate gap an important part of the AUD/USD backdrop alongside US Treasury yields, commodity demand and broader risk sentiment.

What could shift the outlook?

AUD/USD enters September with relative policy expectations doing much of the work. Australia’s cash rate sits above the Federal Reserve target range, but US Treasury yields and the dollar’s defensive role can still offset that advantage when global risk appetite weakens.

The pair may remain supported if the RBA maintains a restrictive stance while US rate expectations soften, although that support could weaken if Australian growth disappoints, the RBA adopts a less restrictive tone or Chinese commodity demand deteriorates.

A firmer Federal Reserve signal could support the US dollar, while softer US labour or inflation data could shift rate expectations in the other direction. The September question is therefore less about which central bank has the higher rate today and more about which policy path markets may need to reprice next.