EUR/GBP drifted lower to 0.8374 as investors brace for the Purchasing Managers Index (PMI) reports from Germany and the Eurozone. Germany's upper parliamentary house approved a significant debt reform plan that bolstered the euro. On Friday, the Bundesrat, Germany's second chamber of parliament, approved a substantial spending package to invest billions of euros in defence, infrastructure, and climate protection. Additionally, concerns that Trump's reciprocal tariffs could significantly hinder the Eurozone's economic growth could add challenges to the shared currency. Last week, Christine Lagarde, President of the European Central Bank (ECB), cautioned about the risks posed by the Trump-led trade dispute while alleviating concerns regarding persistently high inflation in the Eurozone. Adding to this uncertainty, ECB Vice President Luis de Guindos indicated to The Sunday Times that President Trump's policies are causing more economic instability than what was experienced during the COVID-19 crisis. The HCOB Flash France Composite PMI Output Index rose to 47.0 in March, up from February's 45.1, indicating a moderate contraction in private sector activity in the Eurozone's second-largest economy. Germany's Manufacturing PMI rose to 48.3 in March, compared to the anticipated 47.7. The Services PMI for the German economy fell to 50.2 in March, against a forecast of 51.4.

On the other hand, the Bank of England's (BoE) decision to maintain the interest rate, combined with higher-than-expected UK public sector borrowings, undermined sterling. The Office for National Statistics reported on Friday that public sector net borrowing reached £10.7 billion ($13.84 billion) in February, significantly surpassing the median forecast of a £6.6 billion deficit. GfK Consumer Confidence rose by one point to -19 in March 2025, marking the second consecutive increase following -22 in January and -20 in February. This exceeded market expectations of -21 but remains negative, reflecting ongoing consumer caution. However, the bleak economic outlook in the UK, coupled with rising global policy uncertainty and low confidence, could weaken the GBP. The UK economy is still in a "wait-and-see" approach as it anticipates the forthcoming budget from Chancellor Rachel Reeves while facing increasing threats from US trade policies. The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers' Index (PMI) unexpectedly fell to 44.6 in March, down from 46.9 in February, and dropped below the anticipated consensus of 47.3. Conversely, the Preliminary UK Services Business Activity Index climbed to 53.2 in March, rising from February's 51 and exceeding market expectations of 51.2.

Today's Purchasing Managers Index (PMI) reports from the Eurozone and the UK will significantly influence the EUR/GBP exchange rate.

AUD/JPY Rebounds on PMI Data

AUD/JPY recovered to near 94.16, as the Australian Dollar (AUD) gained ground following the release of upbeat preliminary Judo Bank PMI data. In March, Australia's Judo Bank Manufacturing PMI increased to 52.6 from February's 50.4, and the Services PMI rose to 51.2, up from 50.8. Additionally, the Composite PMI improved to 51.3, a rise from the previous 50.6. Market speculation that the Reserve Bank of Australia (RBA) will maintain the current interest rate in the upcoming policy meeting supports the currency. However, RBA's statement in February indicated a more cautious stance than market expectations, emphasising the importance of observing US policy decisions and their potential effects on Australia's inflation forecast. On the geopolitical front, growing optimism surrounding potential Chinese stimulus supports the Australian economy and improved risk sentiment as the White House revises its tariff strategy ahead of the April 2 implementation, strengthening the risk-sensitive AUD.

On the other hand, weaker-than-anticipated PMI data puts additional strain on the Japanese Yen (JPY). Japan's Jibun Bank Services PMI dropped to 49.5 in March from February's six-month peak of 53.7, indicating the first contraction since October and the steepest decline in nine months. Simultaneously, the Manufacturing PMI fell to 48.3 in March from 49.0 in February, falling short of the expected 49.2, thus extending its contraction streak to nine months. The Composite PMI also decreased, sliding from 52.0 in February to 48.5 in March. However, growing market sentiment that the Bank of Japan (BoJ) will continue interest rate hikes, amid hopes that strong wage growth could filter into broader inflation trends, could limit the yen's downside. On Monday, BoJ Governor Kazuo Ueda stated that the central bank will adjust its monetary easing strategy if the 2% inflation target seems likely to be met. He emphasised that our primary goal is to ensure stable prices and that financial considerations will not compromise this aim. BoJ Deputy Governor Shinichi Uchida backed this view, stating that the central bank could raise policy rates to modify monetary easing based on the anticipated economic and price conditions. He also highlighted that the BoJ will continue assessing domestic and international economic and financial market developments.

Broader market sentiment around the Purchasing Managers' Index (PMI) from both economies will guide the AUD/JPY in today's session.

USD/CAD Subdued after Canada's PM Calls Snap Election

USD/CAD struggles near 1.4329, following the announcement by new Prime Minister Mark Carney of a snap election in the country on April 28, undermining the Canadian Dollar (CAD). In addition to the political uncertainty in Canada, favourable developments from the Russia-Ukraine peace negotiations are also affecting the price of oil, undermining the commodity-linked Canadian dollar. On the data front, Canada's Retail Sales fell by 0.6% to C$69.4 billion in January 2025, following a 2.6% increase in December. The drop was primarily driven by lower sales in motor vehicles and parts dealers. Canadian Industrial Product Prices increased by 0.4% month-on-month in February, slightly surpassing the anticipated 0.3%. January's robust figure was revised slightly down to 1.4%. The Canadian Raw Material Price Index also accelerated in February, rising another 0.3% month-on-month compared to the expected contraction of -0.3%. January's raw index was also revised slightly lower, to a still staggering 3.5%.

The greenback faces pressure as concerns about a potential US economic slowdown grow, exacerbated by President Trump's trade policies. Trump has declared April 2 as "Liberation Day," marking the implementation of reciprocal tariffs aimed at aligning US tariffs with those of its trading partners. He has also indicated plans to impose tariffs on key sectors, including automobiles, pharmaceuticals, and semiconductors. Additionally, geopolitical tensions eased after discussions between Ukrainian and US officials in Riyadh on Sunday, with ongoing efforts to broker a ceasefire as Trump pushes for an end to the three-year conflict.

In upcoming sessions, US S&P Global Manufacturing Purchasing Managers Index (PMI) for March, speeches by influential FOMC members and the broader risk sentiment along with Oil price dynamics, will drive the USD/CAD exchange rate.

EUR/JPY Wobbles on Downbeat Japan's PMI Data

EUR/JPY fluctuates near 162.11, following the mixed Eurozone PMI data. Germany's Manufacturing Purchasing Managers' Index (PMI) improved to 48.3 in March from 47.0 in February, surpassing the market consensus of 47. The Services PMI for the country declined to 50.2 in March, down from 51.1 in February, falling short of the anticipated 51.6. The German PMI Composite rose to 50.9 in March, up from 50.4 in February, reaching its highest level since May of the previous year. The Eurozone's Manufacturing Purchasing Managers' Index (PMI) increased to 48.7 in March, up from 47.6 in February, exceeding the market consensus of 48. Meanwhile, the Services PMI dropped to 50.4 in March from 50.6 in February, falling below the expected 51 and hitting a four-month low. The HCOB Eurozone PMI Composite reached 50.4 in March, slightly higher than February's 50.2. The HCOB flash Purchasing Managers' Index (PMI) for services increased to 46.6 from 45.3 in February, surpassing forecasts but still indicating contraction. The manufacturing PMI rose to 48.9 from 45.8, also exceeding expectations. The composite PMI, which encompasses both services and manufacturing, improved to 47.0 from 45.1 but remained in contraction territory.

The Japanese yen is under downward pressure due to disappointing Purchasing Managers' Index (PMI) data, which is lessening the impact of the Bank of Japan's (BoJ) hawkish position. Even despite the BoJ's optimistic perspective, recent data has overshadowed the currency's potential gains. The Jibun Bank Services PMI, which had demonstrated robust growth in February, fell sharply from 53.7 to 49.5 in March, representing the first contraction in services since October and the most significant decline in nine months. This suggests mounting weakness in Japan's service sector, as demand appears to be weakening. Additionally, the Manufacturing PMI decreased from 49.0 in February to 48.3 in March, missing market expectations of 49.2. This signals a continued contraction in the manufacturing sector for the ninth straight month, further dampening sentiment. The Composite PMI, which aggregates both services and manufacturing data, also declined, dropping from 52.0 in February to 48.5 in March. Bank of Japan Governor Kazuo Ueda, addressing parliament on Monday, reiterated that the central bank will adjust its monetary easing if the 2% inflation target seems likely to be met. He emphasised that our primary goal is to ensure stable prices and that financial considerations will not compromise this aim. Bank of Japan Deputy Governor Shinichi Uchida supported this view, stating that interest rate hikes may be implemented if economic and price targets are attainable, alongside ongoing assessments of both domestic and global economic conditions.

Investors will look forward to Monetary Policy Meeting Minutes from the Bank of Japan (BoJ) along with Tokyo CPI data and Eurozone's inflation figures to find fresh impetus on the EUR/JPY exchange rate.

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