EUR/GBP continues its downward momentum near 0.8396, as the Euro (EUR) grapples with deteriorating market sentiment following US President Donald Trump's tariff threats in response to the European Union's (EU) retaliatory measures against the United States (US). The US enacted a 25% tariff on steel and aluminium imported from Europe, leading the EU to retaliate with tariffs on US products worth €26 billion in April. Additionally, Germany's plans for increased state borrowing faced headwinds as Franziska Brantner, co-leader of the Greens party, halted finalising an agreement as the far-left party submitted yet another legal challenge.

Meanwhile, the European Union (EU) is exploring methods to increase defence spending through joint borrowing, utilising EU funds, and enhancing the influence of the European Investment Bank (EIB), with significant decisions anticipated by June. Election winner Friedrich Merz advocates for debt reforms and establishes a €500 billion (£545 billion) infrastructure fund before the current parliament dissolves. However, the success of these initiatives relies on garnering support from the Greens and navigating potential legal challenges. Recent remarks from European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel warned that "US trade tariffs on the European Union (EU) could push Germany into recession this year."

Sterling moves cautiously as investors await the Bank of England's (BoE) monetary policy decision and January's monthly GDP data. The UK's 10-year gilt yield soared to 4.68%, marking the highest level in two months, as expectations grew that the BoE would sustain high interest rates for a prolonged period. UK Prime Minister Keir Starmer remains optimistic that Britain can avoid US tariffs on steel and aluminium, advocating a "pragmatic approach" in negotiations while keeping options open. In contrast to the EU's rapid retaliation against these tariffs, the UK has reaffirmed its commitment to ongoing trade discussions with Washington. Recently, Catherine Mann, a member of the Bank of England's Monetary Policy Committee (MPC), underscored the necessity for a "gradual and cautious" stance on easing monetary policy. She observed that the basis for this gradual approach is now "no longer valid" due to significant volatility arising from financial markets, particularly concerning "cross-border spillovers."

Broader market sentiment around the BoE's monetary policy stance, the UK's monthly Gross Domestic Product (GDP) and the factory data for January will significantly drive the EUR/GBP's movements.

USD/CAD Sinks After BoC Rate Cut

The Canadian Dollar (CAD) gained ground against the US Dollar, approaching the 1.4397 level, following the Bank of Canada's (BoC) decision to cut its key interest rate by 25 bps, marking the BoC's seventh consecutive interest rate cut. During the press conference, BoC Governor Tiff Macklem pointed to rising uncertainty emerging from the constantly fluctuating US trade terms, which are deterring business and consumer confidence. Future PM Carney commented, "We are ready to sit down with the US government and Trump to discuss tariffs and trade. I am ready to meet with Trump and look for a common approach. I'm ready to sit down with Trump at the appropriate time, when there's respect for Canadian sovereignty," which affected market sentiment. On the global front, President Trump boasted on his social media account about imposing an additional 25% tariff, increasing it to 50% on aluminium and steel imports from Canada to the US from March 12 onward. However, he subsequently withdrew his plan to raise tariffs, injecting extreme market volatility into the loonie.

On the other hand, a deteriorating economic outlook due to the tariff war and fears of a US recession could undermine the greenback. US inflation, as measured by the Consumer Price Index (CPI), eased to 2.8% year-on-year in February, down from 3.0% in January, falling below the estimate of 2.9%, as reported by the Labour Statistics on Wednesday. Meanwhile, core CPI inflation, which excludes the volatile food and energy categories, declined to 3.1% in February from 3.3% in the previous month. The headline US CPI increased by 0.2% in February on a month-on-month (MoM) basis, following a sharp 0.5% rise in January, which was lower than the expectation of 0.3%. Core CPI, excluding the volatile food and energy categories, rose by 0.2% during the same period compared to the previous figure of 0.4%. The US budget deficit for the first five months of fiscal year 2025 reached a record £1.15 trillion, the Treasury Department announced on Wednesday. Monthly, the US deficit amounted to just over £307 billion, which is 4.0% higher than last year. Cooling inflationary pressure has affirmed market speculation that the US Federal Reserve (Fed) may cut rates sooner than previously thought.

Investors will closely monitor the US Producer Price Index (PPI), with key consumer sentiment and consumer inflation expectations data for fresh direction on the USD/CAD's movements.

EUR/JPY Declined Amid EU-US Trade War Fears

EUR/JPY softened near 161.10 due to increasing demand for safe havens and the expectation that the Bank of Japan (BoJ) will keep raising interest rates this year due to ongoing wage growth and inflation bolstering the yen. Recent remarks from Bank of Japan (BoJ) Governor Kazuo Ueda stated, "Underlying inflation is still somewhat below 2%," steering market sentiment. He further added that he anticipates underlying inflation to increase as the economy steadily recovers. Expect Japan's real wages and consumption to improve gradually as the rise in import costs moderates, with wage growth predicted to stay robust. On Thursday, Japanese Finance Minister Shunichi Kato warned that Japan has not fully defeated deflation, emphasising that the economy currently struggles with a supply shortage instead of weak demand.

While fears that President Donald Trump may introduce new tariffs on Japan undermine the yen, rising Japanese government bonds (JGB) yields can bolster the currency. On Tuesday, GDP data revealed that Japan's economy grew by 0.6% quarter-on-quarter (QoQ) in Q4 2024, slightly below the preliminary estimate of 0.7%. Year-over-year, Japan's GDP increased by 2.2% in Q4, lower than the initial forecast of 2.8%. The BSI Large Manufacturing Conditions Index (QoQ) registered -2.4, a decrease from the previous reading of 6.3. Additionally, the Producer Price Index (PPI) dipped to a year-on-year rate of 4.0% in February, down from 4.2% the month before.

On the other hand, the Euro struggles amid dampened market sentiment following the European Union's (EU) retaliatory tariffs on the United States (US). Traders remain cautious as Germany's plans to increase state borrowing hit new challenges significantly. On Wednesday, a co-leader of the Greens party remained uncertain about reaching an agreement, while the far-left party launched yet another legal challenge. At the same time, election winner Friedrich Merz is pushing to pass debt reforms and set up a €500 billion ($545 billion) infrastructure fund before the outgoing parliament is dissolved. The success of these proposals relies on securing support from the Greens, and further delays could be faced due to potential court rulings.

In the upcoming sessions, optimism surrounding Ukraine ceasefire talks, growing recession fears, and any significant development in the EU-US trade war will shape the market sentiment around the EUR/JPY exchange rate.

AUD/USD Wobbles Ahead of US PPI Data

AUD/USD declined to 0.6286 owing to a weakened US Dollar in the wake of softer US inflation data, which strengthened expectations that the Federal Reserve (Fed) may raise interest rates earlier than expected. The US Consumer Price Index (CPI) rose by 0.2% month-on-month in February, following a sharp increase of 0.5% in January. This figure was softer than the expected 0.3%. The core CPI, which excludes volatile food and energy categories, also increased by 0.2% month-on-month during the same period. Recent stronger-than-expected US JOLTS job openings data has bolstered the greenback. Job postings rose to 7.74 million in January, exceeding the forecast of 7.63 million, up from December's revised figure of 7.51 million, which was adjusted down from 7.6 million. February's Nonfarm Payrolls increased by 151,000, falling short of the 160,000 target.

The increasing risk of escalation in the trade war between the US and China – the world's two largest economies – is weighing on the Australian Dollar (AUD). China's retaliatory tariffs on specific US agricultural products came into effect on Monday, following the increase in US tariffs from 10% to 20% on imports from China last week, taking into account China's role as Australia's largest trading partner. On the data front, Australia's Consumer Inflation Expectations, which reflect consumer views on future inflation over the next 12 months, decreased to 3.6% in March, down from 4.6% in February—the highest level recorded since April 2024. The Westpac–Melbourne Institute Consumer Sentiment Index rose 4% in March, reaching 95.9 from 92.2 in February. NAB Business Confidence fell from 5 to -1, reversing last month's gain and dropping below average. Business conditions slightly improved from 3 to 4, but employment conditions decreased from 5 to 4. On Wednesday, Prime Minister Anthony Albanese stated that "Australia will not impose reciprocal tariffs on the US," highlighting that retaliatory actions would only raise costs for Australian consumers and exacerbate inflation.

Broader market sentiment around Thursday's US Producer Price Index (PPI) data and weekly jobless claims will drive the AUD/USD's movements.

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