EUR/GBP lost ground near 0.8407 following the German parliament's approval of plans for a massive spending surge, marking a departure from decades of fiscal conservatism. The goal is to boost economic growth and increase military spending for a new era of European collective defence supported by the euro. Germany's major political parties—including the CDU/CSU bloc, SPD, and the Greens—have approved a historic €500 billion spending package for defence and infrastructure, significantly increasing the national debt. Furthermore, on Tuesday, US President Donald Trump and Russian President Vladimir Putin agreed to halt strikes on energy infrastructure immediately. However, Putin declined to support a more extensive month-long ceasefire that Trump's team had negotiated with Ukrainian officials in Saudi Arabia.

On the data front, the German ZEW Economic Sentiment Index surged to 51.6 in March, up from 26 in February, significantly surpassing the market expectation of 48.1. The Current Situation Index also improved to -87.6 in March, an increase from February's -88.5, although it still fell short of the anticipated -80.5. Meanwhile, the Eurozone ZEW Economic Sentiment Index recorded 39.8 in March compared to 24.2 in February, slightly above the expected 39.6. The trade balance for the single-currency region was €1.0bn in January, a sharp decline from the €15.4bn surplus in December and the €10.6bn surplus in January 2024. This represents the lowest surplus since May 2023, while the market consensus had projected a number closer to €14bn. Eurozone exports reached €232.6bn, reflecting a 3% increase year-on-year, but imports surged by 7.6% to €231.5bn.

Analysing the monetary policy outlook, market participants expect two interest rate cuts from the European Central Bank (ECB)—likely in April and June—hoping that the ECB may pause its monetary easing cycle after six interest rate cuts since June 2024. Conversely, the Bank of England (BoE) is expected to keep interest rates steady following gradual movements amid heightened economic uncertainty and mixed news on the UK's economy.

Tomorrow's BoE interest rate decision, along with today's Harmonised Index of Consumer Prices (HICP) inflation data from the Eurozone and speeches from European Central Bank (ECB) policymakers, will shape market sentiment regarding the EUR/GBP exchange rate.

USD/CAD Wobbles As Canadian Inflation Accelerates

USD/CAD struggled near 1.4311, as the Canadian Dollar (CAD) stabilised after Canadian Consumer Price Index (CPI) inflation accelerated faster than expected in February. According to Statistics Canada, the CPI rose to 2.6% year-on-year in February, up from 1.9% in January. This figure exceeded the market expectation of 2.1%. On a month-to-month basis, the CPI increased by 1.1%, following a rise of 0.1% in January. The core CPI, which excludes volatile food and energy prices, saw a monthly rise of 0.4%, matching January's increase. Lastly, the Bank of Canada's core CPI climbed 2.7% on a yearly basis, following an increase of 2.1% in January. A sharp rise in inflationary pressure reinforced the market bets around another interest rate cut by the Bank of Canada (BoC), hinting at the BoC's aggressive monetary expansion stance. Moreover, the BoC's decision to reduce interest rates last week continues to dampen market sentiment as inflationary pressure remains above the Canadian central bank's 2% annualised inflation target. Growing concerns over a trade war between Canada and the US and subdued crude oil prices could add selling pressure on the commodity-linked loonie.

On the other hand, the greenback remains firm, supported by stable US Treasury yields ahead of the Federal Reserve's (Fed) interest rate decision. The market anticipates that the US Central Bank will maintain the same interest rate as Trump's tariff policies, which are expected to renew inflationary pressure and induce an uncertain economic outlook. On the data front, industrial production in the United States rose by 0.7% month-over-month in February, compared to 0.3% in January, above the market consensus of 0.2%. In February, retail sales saw a month-on-month increase of 0.2%, falling short of the market forecast of 0.7%. This rise followed a revised decline of -1.2% in January, which was previously noted as -0.9%. Retail sales increased by 3.1% compared to last year, down from a revised 3.9% in January (initially reported at 4.2%). On Friday, the University of Michigan (UoM) revealed a drop in its preliminary Consumer Sentiment Index for March, which fell to 57.9, the lowest level since November 2022, from 64.7. This figure also missed the consensus estimate of 63.1. Additionally, the UoM's five-year Consumer Inflation Expectation rose to 3.9% in March, up from 3.5% in February.

In today's session, investors will closely monitor the Fed's updated economic projections for insights into the future path of US interest rates and USD/CAD exchange rates.

GBP/JPY Stumbles as BoJ Keeps Interest Rate Steady

GBP/JPY fluctuated around 194.02 following the Bank of Japan's (BoJ) decision to maintain its policy rate unchanged at its March meeting, reinforced by a statement noting, "Concerning risks to the outlook, there remain high uncertainties surrounding Japan's economy and prices, including the evolving situation regarding trade and other policies in each jurisdiction." During the post-meeting press conference, BoJ Governor Kazuo Ueda indicated that the central bank aims to guide policy with a focus on sustainably and steadily achieving its price target, and it will continue to adjust the level of easing as necessary to attain this outlook. On Tuesday, Japan's Finance Minister Katsunobu Kato remarked, "We will respond appropriately, keeping in mind that the market should determine its own movements." He further noted that "bond markets should determine interest rate changes" after the 40-year government debt yield briefly surged to an unprecedented high. The increased economic uncertainty and escalating geopolitical tensions in the Middle East may enhance safe-haven investments, potentially supporting the JPY.

On the data front, Japan's trade balance shifted to a surplus of ¥584.5 billion in February, up from a deficit of ¥415.43 billion in the same month last year. This change was driven by a significant increase in exports, which rose by 11.4% year-on-year, alongside an unexpectedly sharp decline of 0.7% in imports. In contrast, Japan's machinery orders fell by 3.5% month-on-month in January 2025, a larger decrease compared to the 1.2% decline observed in the previous month. Year-on-year, machinery orders increased by 4.4% in the reported month, slightly surpassing December's growth of 4.3% yet falling short of the anticipated 6.9%. On Friday, Japan's annual spring labour negotiations revealed that companies largely complied with union requests for substantial wage increases for the third straight year. This trend may boost consumer spending and lead to higher inflation, allowing the BoJ to proceed with rate hikes supporting the yen.

Sterling remains cautious as investors brace for the United Kingdom (UK) labour market data for the three months ending January and the BoE's monetary policy decision. The BoE is widely expected to maintain interest rates at 4.5%. BoE Monetary Policy Committee (MPC) members Catherine Mann and Swati Dhingra are anticipated to support a rate cut, while the remaining seven policymakers are likely to vote to keep rates unchanged. Investors will be closely watching BoE Governor Andrew Bailey's comments on the UK economic outlook, particularly in light of the ongoing impact of US President Trump's tariff policies. On Tuesday, US Treasury Secretary Scott Bessent confirmed in an interview with Fox Business that reciprocal tariffs would take effect on April 2. He expressed optimism, suggesting that some of these tariffs could be avoided if a deal is "pre-negotiated." Bessent further noted that once countries are given their "reciprocal tariff number," they may come to the US to "negotiate it down" in a more favourable way.

In the upcoming sessions, the monetary policy stance of both central banks, the BoJ and the BoE will shape the market sentiment for the GBP/JPY's direction.

NZD/USD Subdued by Weakening Consumer Confidence

NZD/USD declined to around 0.5788 after the release of New Zealand's Q1 2025 Westpac Consumer Survey, which revealed weakening consumer confidence. Westpac New Zealand reported that its confidence index fell to 89.2 in Q1 from 97.5 in the previous period, marking the lowest level since Q2 2024 due to mounting trade tensions, persistent cost-of-living pressures, and volatility in financial markets. On Monday, New Zealand's Business NZ Performance of Services Index (PSI) dropped to 49.1 in February from 50.4 in January, indicating a return to contraction in the services sector. This uneven recovery from the recession strengthens expectations for further rate cuts, which is in line with the Reserve Bank of New Zealand's (RBNZ) indication of additional easing last month.

China unveiled a special action plan over the weekend to enhance consumption and boost market sentiment in the region. This initiative encompasses strategies to increase wages, stimulate household spending, and stabilise the stock and real estate markets. Growing optimism regarding China's economic prospects continues to support the New Zealand Dollar (NZD). In January-February, China's retail sales rose by 4.0% year-on-year, up from a 3.7% increase in December. Additionally, industrial production increased by 5.9% YoY during this period, surpassing the 5.3% forecast but slightly lower than the previous reading of 6.2%.

The US dollar has rebounded due to market sentiment surrounding the Federal Reserve's (Fed) interest rate decision. Any hawkish signals from Fed policymakers could bolster the USD against its peers. On the data front, retail sales rose by 0.2% month-on-month in February, falling short of the expected 0.7%. This followed a revised decline of -1.2% in January (previously reported as -0.9%). On an annual basis, retail sales increased by 3.1%, down from the revised figure of 3.9% in January, which was initially 4.2%. Industrial production in the US grew by 0.7% month-on-month in February, according to a report from the Federal Reserve on Tuesday. This figure followed a 0.3% increase in January and exceeded the market expectation for growth of 0.2%. However, the greenback encounters challenges as weak US economic data and renewed tariff threats from President Donald Trump contribute to investor uncertainty.

Apart from today's Federal Reserve (Fed) interest rate decision, Thursday's quarterly GDP data from New Zealand will significantly influence the NZD/USD exchange rate.

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