EUR/GBP hovered near 0.8407, as the euro strengthened after Germany reached a deal on debt reform and a substantial increase in state spending. On Friday, Chancellor Friedrich Merz reached an agreement with the Green and Social Democrat parties in preparation for an important parliamentary vote on Tuesday concerning revisions to borrowing rules. Additionally, increased market sentiment surrounding a Russia-Ukraine truce, ahead of President Trump and Russian leader Vladimir Putin's meeting, could improve the euro's appeal. However, the historic German debt reforms could potentially increase Eurozone inflation expectations, contrasting with the European Central Bank's (ECB) current monetary expansion stance.

On Sunday, ECB Vice President Luis de Guindos expressed concern over President Trump's policies, citing that they could create greater economic uncertainty than the COVID-19 crisis. He pointed out that the new US administration seems less committed to multilateralism, which encourages international cooperation, and he characterised this shift as a significant source of instability. Furthermore, François Villeroy de Galhau, a member of the ECB Governing Council and the Governor of the Banque de France stressed the importance of enhancing the euro's global presence. In a weekend interview with La Tribune Dimanche, he advocated for creating a "robust savings and investment union" to draw international investors to the euro, supporting the single currency.

On the other hand, a disappointing UK Gross Domestic Product (GDP) report dragged the pound lower against its major peers. In January, the UK's GDP fell by 0.1% compared to the previous month, missing the expected growth of 0.1%. This decline was mainly due to a downturn in the manufacturing and industrial sectors. Conversely, the UK Index of Services recorded a 0.4% rise over three months, indicating resilience within the services sector despite the overall economic challenges. The UK's Industrial Production decreased by 0.9% month-over-month, failing to meet market expectations of a 0.2% increase, highlighting ongoing issues within the manufacturing industry. Furthermore, UK Construction Output declined by 1.2% in January, significantly contrasting with the anticipated 0.4% growth, exposing vulnerabilities in that sector.

The BoE's monetary policy decision on Thursday and the Eurozone's economic docket—including German ZEW Economic Sentiment, Trade Balance, and yearly Consumer Price Index (CPI) data—will significantly affect the EUR/GBP exchange rate in the upcoming week.

AUD/JPY Buoyed by China's Stimulus Measures

AUD/JPY gained ground near 94.41, as the Australian dollar (AUD) strengthened following Monday's release of China's economic data. China's retail sales for January-February increased by 4% year-on-year (YoY), matching expectations of 4% and surpassing December's 3.7%, according to the latest data released by the National Bureau of Statistics (NBS) on Monday. Chinese industrial production rose by 5.9% YoY in the same period, compared to the forecast of 5.3% and the previously recorded 6.2%. Meanwhile, fixed asset investment rose to 4.1% year-to-date YoY in January-February, exceeding the expected figure of 3.6%. The December reading was 3.2%.

On the global front, Trump's decision to uphold a 25% tariff on Australian aluminium and steel exports, which are valued at almost $1 billion, may weigh on the Australian dollar. However, Australian Prime Minister Anthony Albanese confirmed that Australia will refrain from imposing reciprocal tariffs on the US. He highlighted that such retaliatory actions would only increase costs for Australian consumers and contribute to inflation.

On the other hand, Chinese stimulus measures have improved global risk sentiment, undermining the safe-haven JPY. However, the Bank of Japan's (BoJ) approach to heightening global uncertainty could affect the upcoming interest rate decision, influencing market anticipation and injecting market volatility into the yen. Last week's economic data revealed that Japan's largest trade union group, Rengo, secured an average wage increase of 5.46% for the fiscal year 2025, compared to the demand for a 6.09% increase. Last week, Bank of Japan Governor Kazuo Ueda stated, "Underlying inflation is still below 2%," affecting market sentiment. He anticipates inflation to rise as the economy recovers, gradually boosting Japan's wages and consumption as import costs stabilise, with strong wage growth expected. Finance Minister Shunichi Kato warned that Japan hasn't completely overcome deflation, emphasising supply shortages over weak demand.

Broader market sentiment regarding Trump's tariffs and the BoJ’s monetary policy decision will influence the AUD/JPY’s movements.

EUR/USD Wobbles Ahead of Fed's Policy Decision

EUR/USD hovers around 1.0886 as investors brace for the Federal Reserve's (Fed) interest rate decision. The Fed's dot plot will influence the greenback, which indicates where officials expect interest rates to move in both the short and longer term, along with the projections for growth, employment, and inflation outlined in the Summary of Economic Projections (SEP). During the December meeting, Fed policymakers forecasted two interest rate cuts for this year. However, the market anticipates that Trump's tariff policies could be inflationary and batter households' consumption, affecting the Fed's policy stance.

On the data front, the preliminary report from the University of Michigan's Consumer Sentiment Index exhibited a decline in US Consumer Sentiment in early March. The index dropped from 64.7 in February to 57.9, falling short of market expectations. The Current Conditions Index fell from 65.7 to 63.5, while the Consumer Expectations Index decreased from 64.0 to 54.2. The survey showed a notable increase in one-year inflation expectations—from 4.3% to 4.9%—and a five-year outlook from 3.5% to 3.9%.

Investors will also look forward to Fed Chair Jerome Powell's comments on the current economic scenarios and tariff policies in the press conference following the monetary policy decision. On Sunday, US Treasury Secretary Scott Bessent said in an interview with NBC News, "I can predict that we are putting in robust policies that will be durable, and could there be an adjustment," adding that the country needed to be weaned off of "massive government spending." His comments followed a question about whether Trump's agenda could lead the economy into a recession. Last week, US Commerce Secretary Howard Lutnick stated that policies by the President are the most important thing America has ever had, and "they're worth it" when asked whether it would be worth executing Trump's policies even if they led to a recession.

On the other hand, the German debt restructuring plan and a substantial increase in state spending supported the euro. Friedrich Merz, the incoming chancellor, finalised an agreement with the Green and Social Democrat parties on Friday in preparation for an important parliamentary vote on Tuesday regarding borrowing rule reforms. However, a potential US-European Union (EU) tariff war, following President Trump's threat to impose 200% tariffs on European alcohol after the EU proposed retaliatory tariffs on the US against a 25% blanket levy on steel and aluminium imported by the US, could undermine the euro.

With no key Eurozone data on the docket, trade tensions between the EU and the US, along with today's US Retail Sales and the Empire State Manufacturing Index, will drive the EUR/USD's movements.

NZD/USD Rallies on Robust Chinese Data

NZD/USD edges higher near 0.5773, following the release of China's high-impact economic data. China's industrial production rose 5.9% year-on-year (Y/Y) in February 2025, exceeding analysts' expectations of a 5.3% increase, indicating strong performance in the manufacturing and industrial sectors early in the year. Retail sales for January- February 2025 grew by 4.0% Y/Y, which is in line with market forecasts, suggesting steady consumer spending. Fixed asset investment for the same period rose by 4.1% Y/Y, surpassing the projected 3.6%, highlighting continued infrastructure and capital spending strength. Meanwhile, the unemployment rate for February 2025 increased to 5.4%, up from 5.1% in the previous period, pointing to a slight rise in labour market pressures.

On Sunday, China's State Council announced a unique action plan designed to stimulate domestic consumption and introduced measures to boost household incomes. Additionally, Shenzhen has relaxed its housing provident fund loan policies to invigorate the property market and address the surplus. Positive economic indicators from China, along with improved market sentiment concerning the country's measures to stimulate consumption with the intent of increasing wages, boosting household spending, and stabilising the stock and real estate markets, are enhancing overall market sentiment in the region. Any positive changes in China tend to support the NZD, given China's role as a key trading partner for New Zealand. On the domestic front, New Zealand's Business NZ Performance of Services Index (PSI) fell to 49.1 in February from 50.4 in January, signalling a return to contraction in the services sector.

The greenback was under pressure following the University of Michigan's (UoM) Friday report revealing a decline in its preliminary Consumer Sentiment Index for March. The index dropped to 57.9—its lowest point since November 2022—from the previous 64.7, falling short of the consensus estimate of 63.1. Recent softer US inflation data and indications of a slowing labour market could compel the Federal Reserve (Fed) to reduce interest rates multiple times this year.

While investors will focus on today's US Retail Sales and the Empire State Manufacturing Index, market sentiment surrounding the highly anticipated two-day FOMC policy meeting will be a key driving factor influencing the NZD/USD exchange rate.

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