EUR/GBP dropped around 0.8321 after Trump remarked, "It will happen with the European Union. I can tell you that because they've really taken advantage of us," which weakened the euro. The potential trade conflicts, along with the risk of economic slowdown, are likely to keep the euro on the back foot. The Eurozone economy remained sluggish in Q4 2024, falling short of the 1% forecast. The bloc's Gross Domestic Product (GDP) grew at an annual rate of 0.9% in Q4, matching Q3 but beneath the expected 1%. Unemployment rose to 6.3% in December, up from 6.2% in November. Flash German GDP data indicated a 0.2% contraction in Q4, improving from a 0.3% decline in Q3.

Monday’s flash Harmonized Index of Consumer Prices (HICP) report for January indicated that price pressures eased monthly. The core HICP – which excludes volatile food and energy prices – decreased by 1% after an increase of 0.5% in December. During the same period, the headline HICP also fell by 0.4%. Year-on-year, the headline HICP rose steadily by 2.7%, surpassing estimates of 2.6%. The core HICP increased as expected by 2.5%, exceeding forecasts of 2.4%. The dovish sentiment around the European Central Bank’s (ECB) policy outlook, anticipating a further reduction in the interest rates, stays persistent amid weakness in the Eurozone economy.

Sterling exhibits a mixed performance due to the confident market sentiment surrounding the Bank of England's (BoE) potential rate cut of 25 bps to 4.5% in its first policy meeting of the year, alongside the risk of stagflation in the UK economy, driven by weakening labour demand and persistent inflation. Meanwhile, 30-year UK gilt yields have dropped to about 5.04%, marking the lowest level in nearly two weeks, as expectations grow that US President Trump will avoid initiating a trade conflict with Britain.

With the absence of any relevant data from both regions, speculations around Trump’s upcoming policies for both the UK and Eurozone will drive the EUR/GBP pair.

NZD/USD Rebounds Amid Escalating Trade Dispute

NZD/USD hovers near 0.5607 amid growing US-China trade tensions, which provoked risk-off sentiment. China responded to Tuesday's new 10% US tariff by implementing its own tariffs, including a 15% levy on US coal and liquefied natural gas (LNG) imports and an additional 10% on crude oil, farm equipment, and certain automobiles. Moreover, China’s Commerce Ministry declared new export guidelines, controlling tungsten, tellurium, ruthenium, molybdenum, and related products to "safeguard national security interests."

Downbeat Chinese economic data continues to weigh on the China-proxy Kiwi, as China is a major trading partner to New Zealand. China’s Manufacturing Purchasing Managers Index (PMI) eased to 50.1 in January, weaker than both the expected figure and the previous reading of 50.5. Additionally, market expectations of a 50bps reduction to 3.75% by the Reserve Bank of New Zealand (RBNZ) in an upcoming policy meeting could further pressure the New Zealand Dollar (NZD).

The greenback strengthened due to its enhanced appeal as a safe-haven asset amid heightened global trade tensions. However, Trump’s agreement to delay implementing tariffs on Mexico and Canada capped the currency's upside. The ISM Manufacturing PMI rose to 50.9 in January from 49.3, surpassing expectations of 49.8. The Prices Paid Index increased to 54.9, the Employment Index rose to 50.3, and the New Orders Index improved to 55.1.

In the absence of any market-moving data from New Zealand, the broader market sentiment around US-China trade tensions, JOLTS Job Openings, and Factory Orders m/m figures will drive the NZD/USD exchange rate.

GBP/JPY Buoyed by Escalating US-China Trade Tensions

GBP/JPY climbs close to 192.92 as increasing US-China trade tensions and signs of uncertainty boost safe-haven demand for the JPY. Furthermore, China retaliated to the new 10% US tariff by imposing its own, including a 15% levy on US coal and LNG imports and an additional 10% on crude oil, farm equipment, and cars, which supported the yen.

The Bank of Japan's Summary of Opinions highlighted discussions regarding further rate hikes, supported by Tokyo’s core inflation rising at its fastest annual pace in nearly a year. The Tokyo CPI for January increased by 3.4% year-on-year, up from 3.0% in December. Meanwhile, Tokyo's CPI, excluding Fresh Food and Energy, rose to 2.5%, surpassing December's 2.4%. This strengthens the case for BoJ tightening and provides support for the JPY. On Monday, Japan's Finance Minister Katsunobu Kato remarked that the government plans to monitor the impact of Trump's new tariffs on its currency amid concerns about the potential economic fallout.

On the sterling front, expectations of the Bank of England (BoE) to restart its policy-easing cycle, likely cutting interest rates by 25 bps to 4.5% in the upcoming policy meeting, fluctuate the currency. Recent UK core CPI figures excluding volatile items prices such as energy and food – decelerated to 3.2% in December. Additionally, the latest labour market figures indicated that the economy added 35K new workers as business owners delayed the hiring process due to dissatisfaction with Chancellor of the Exchequer Raches Reeves’s announcement of raising employers’ contribution to National Insurance (NI). On the economic front, the seasonally adjusted S&P Global UK Manufacturing Purchasing Managers' Index rose to 48.3 in January, up from December's 11-month low of 47.0 and slightly above the anticipated 48.2.

Investor sentiment regarding the Bank of England’s (BoE) interest rate decision on Thursday will influence the GBP/JPY movements.

AUD/USD Wobbles as US-China Trade War Fears Loom

AUD/USD faced challenges near 0.6207 amid ongoing US-China trade war tensions. China has responded to the newly imposed 10% US tariff that began on Tuesday. The Commerce Ministry revealed a 15% tariff on imports of US coal and liquefied natural gas (LNG), plus an extra 10% charge on crude oil, agricultural machinery, and specific automobiles. Additionally, China has enacted export controls on tungsten, tellurium, ruthenium, molybdenum, and similar products to safeguard national security.

Australia's Retail Sales dropped by 0.1% month-on-month in December 2024, marking the first decrease in nine months, though it was less than the anticipated 0.7% contraction. On an annual basis, retail sales rose by 4.6% compared to December 2023. Seasonally adjusted, sales increased by 1.0% quarter-on-quarter in Q4 2024. Meanwhile, China's Caixin Manufacturing PMI fell to 50.1 in January, down from 50.5 in December, falling short of market expectations, which had anticipated a stable 50.5. Additionally, the rising likelihood of a Reserve Bank of Australia (RBA) rate cut in February could undermine the Aussie. The RBA has kept the Official Cash Rate (OCR) at 4.35% since November 2023, stressing that inflation must “sustainably” return to the 2%-3% target range before any policy easing.

The US dollar (USD) strengthened as global trade tensions spurred demand for safe-haven assets. However, gains were trimmed after Trump delayed tariffs on Mexico and Canada. In the upcoming sessions, along with US-China trade concerns, the latest job openings, ADP Employment Change and Nonfarm Payrolls (NFP) data, and the US ISM Services PMI figures will guide the AUD/USD exchange rate.

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