EUR/GBP climbed to 0.8411 as the euro gained support from HCOB Eurozone preliminary Composite PMI figures for January. The Eurozone Manufacturing PMI rose to 46.1 in January, exceeding expectations of 45.3. However, the Services PMI fell to 51.4 from 51.6 in December, missing the 51.6 consensus. The Eurozone Composite PMI improved to 50.2, up from 49.6 in December, marking a five-month peak. In Germany, the Manufacturing PMI unexpectedly climbed to 44.1 from 42.5, its highest in eight months, while the Services PMI rose to 52.5 from 51.2, marking a six-month high. Additionally, speculation persists that the European Central Bank (ECB) will reduce its Deposit Facility rate by 25 bps in its next policy meeting.

Friday's stronger-than-expected preliminary UK S&P Global/CIPS PMI data for January supported sterling against its major peers. The Manufacturing PMI rose to 48.2 in January from 47 in December, exceeding expectations of 47.1. The Preliminary UK Services Business Activity Index increased to 51.2 from 51.1 in December, surpassing the forecast of 50.6. Meanwhile, recent softer economic data has prompted expectations of a 25 bps interest rate cut by the Bank of England (BoE) in the February meeting.

With limited UK data scheduled for release this week, broader market sentiment surrounding Thursday's ECB policy meeting and preliminary Eurozone Q4 GDP data will be key drivers for EUR/GBP's movements.

EUR/USD strengthens on Trump tariff fears

EUR/USD edged higher against the dollar, trading near 1.0487, following the Eurozone preliminary Composite PMI report. The Composite PMI, which measures overall private sector activity, rose to 50.2 from 49.6 in December, highlighting strong performance in the euro area, primarily driven by the German economy, which returned to growth while the French economy continued to decline. Today's German IFO Business Climate Index rose to 85.1 in January from 84.7 in December, surpassing the 84.6 forecast. The Current Economic Assessment Index increased to 86.1 from 85.1, exceeding expectations of 85.4. However, the IFO Expectations Index, reflecting firms' six-month projections, eased slightly to 84.2 from 84.4, falling short of the forecast of 84.

President Donald Trump's remarks last week continued to weigh on the US dollar: "With oil prices going down, I'll demand that interest rates drop immediately, and likewise, they should be dropping all over the world." Meanwhile, US private sector economic activity continued to expand in January, though slower, with the S&P Global Composite PMI falling to 52.4 from 55.4 in December. The Manufacturing PMI rose to 50.1 from 49.4, surpassing the expected 49.6, while the Services PMI dropped to 52.8 from 56.8.

In the upcoming week, investors will monitor Durable Goods Orders, the Personal Consumer Expenditure Price Index (PCE) data, preliminary Q4 Gross Domestic Product data, the ECB's interest rate decision, and ECB President Christine Lagarde's press conference for further direction on EUR/USD movements.

AUD/USD sinks on risk-off sentiment

AUD/USD weakened to 0.6290 as cautious market sentiment dampened demand for the risk-sensitive Australian dollar. Additionally, mixed Chinese Purchasing Managers' Index (PMI) data and China's fresh stimulus measures to promote its development of index investment products have failed to support the Aussie. Judo Bank's Composite PMI rose to 50.3 in January, up from 50.2 in December, reflecting four months of modest private sector growth. The Manufacturing PMI increased to 49.8, ending a 13-month contraction, while the Services PMI fell to 50.4, a six-month low.

China's NBS Manufacturing PMI dropped to 49.1 in January from 50.1 in December, below the expected 50.1. The NBS Non-Manufacturing PMI also fell to 50.2 from 52.2 in December. While President Trump's remarks, "I would rather not have to use tariffs on China," restored optimism about potential progress in US-China trade negotiations, uncertainty surrounding the impact of potential trade and immigration policies continues to weigh on the China-proxy Australian dollar.

The broader risk sentiment surrounding both currencies will be crucial for AUD/USD movements. Additionally, growing uncertainty regarding President Trump's trade policies could steer market sentiment and influence the Federal Reserve's interest rate decisions, creating volatility for the US dollar.

GBP/USD struggles following UK Services PMI

GBP/USD traded near 1.2481 as President Trump's decision to impose a 25% tariff on all imports from Colombia spurred upward momentum in the USD Index (DXY). Trump's tariff imposition came after Colombia refused to allow US military planes carrying deported migrants to land. Trump warned of a potential 50% tariff increase next week for further noncompliance, heightening concerns over global trade wars and dampening risk appetite.

On the economic front, data released by S&P Global on Friday showed that the US Composite PMI declined to 52.4 in January from 55.4 in December. Meanwhile, the Manufacturing PMI rose to 50.1 in January compared to the prior 49.4, surpassing the estimate of 49.6. However, the Services PMI fell to 52.8 in January from 56.8, below the market consensus of 56.5.

Sterling rallied on stronger-than-expected PMI figures. The Preliminary UK Services Business Activity Index rose to 51.2, slightly up from 51.1 in December, surpassing the forecast of 50.6. Reports also revealed that employment levels fell for the fourth consecutive month, and cost pressures in the private sector increased, leading to higher inflation as producers passed on rising input costs to customers. The deepening risk of stagflation will support dovish BoE bets, further influencing sterling movements.

This week, the BoE's Quarterly Bulletin, along with a US economic docket featuring Durable Goods Orders, the Conference Board's Consumer Confidence Index, Unemployment Claims, and the Richmond Manufacturing Index, as well as the Federal Reserve's monetary policy decision, will significantly influence the GBP/USD exchange rate.

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