EUR/GBP softened near 0.8301 as Germany's GfK Consumer Confidence Survey highlighted the lowest level since April 2024, signalling persistent challenges for the new government. Germany's GfK Consumer Confidence Survey dropped to -24.7 for March 2025, down from a slightly revised -22.6 in the previous period and below market expectations of -21.4. Tuesday's GDP data showed that Germany's economy contracted by 0.2% quarter-on-quarter in Q4 2024, which aligns with earlier estimates after 0.1% growth in the prior quarter. A negative impact from net trade primarily influenced the decline, with exports falling by 2.2% and imports rising by 0.5%. Year-on-year, the economy also contracted by 0.2% in Q4, validating earlier forecasts and marking the sixth consecutive quarter of decline.

Moreover, the results of Germany's federal election have created further instability for the euro, as no single party has secured a clear majority, posing risks to growth in an already fragile economy. Preliminary outcomes show that the conservative Christian Democratic Union (CDU), headed by chancellor candidate Friedrich Merz, and its ally, the Christian Social Union (CSU), won the election. Investors will closely monitor the strategies the conservative Christian Democrats employ to form a coalition government to revitalise the struggling economy. Tuesday's comments from ECB board member Isabel Schnabel asserted that "the natural rate of interest in the Euro area has increased appreciably over the past two years" and suggested that "the nature of the inflation process is likely to have changed lastingly."

On the other hand, investors are bracing for fresh insights into the Bank of England's (BoE) monetary policy stance, holding a cautious outlook for the pound. The CBI Distributive Trades Survey showed that year-on-year retail sales volumes declined in February for the fifth consecutive month, remaining in negative territory and only showing a slight improvement from -25 to -23. Recent remarks from Prime Minister Keir Starmer outlined plans for a substantial increase in defence spending, targeting an elevation to 3% of the nation's economic output over the next decade, with statements reflecting "the biggest sustained increase in defence spending since the end of the Cold War."

In today's session, investors will closely monitor BoE Monetary Policy Committee (MPC) member Swati Dhingra's speech to determine the fresh direction in the EUR/GBP exchange rate.

AUD/USD Sinks Following Australia's CPI Inflation Data

AUD/USD lost momentum near 0.6325 following the release of monthly Australian inflation numbers. Australia's monthly Consumer Price Index (CPI) recorded a 2.5% year-on-year rise in January, consistent with December's increase but below market expectations of 2.6% growth. China's Commerce Ministry announced that Vice Minister Wang Shouwen met with US business leaders, according to the country's International Trade Representative. Market reports indicate that the Trump administration intends to tighten chip export controls to China, a vital trading partner for Australia, which may lead to volatility in the Aussie. The Chinese government has announced its 2025 annual policy statement, highlighting rural reforms designed to revitalise the agricultural sector and enhance food security in response to US tariffs, economic slowdowns, and climate change challenges. Recent comments from RBA Governor Michele Bullock cautioned that excessive monetary easing may hinder disinflation and elevate inflation above the target. She emphasised the RBA's commitment to data-driven decisions and thorough risk assessment, highlighting the necessity for caution despite the potential for rate cuts.

On the other hand, the soft US Conference Board's Consumer Confidence Index dampened investor sentiment, adding selling pressure to the dollar. The US Consumer Confidence Index fell to 98.3 in February from 105.3 in January, marking its largest decline since August 2021. Another key measure of inflation, the University of Michigan Consumer Sentiment Index, has fallen to 64.7, below the forecast of 67.8 and the previous reading. Meanwhile, five-year consumer inflation expectations have risen to 3.5%, exceeding the consensus of 3.3% and the prior reading.

In today's session, uncertainty over the ongoing Russia-Ukraine conflicts and renewed fears stemming from Trump's tariff plans will shape market sentiment regarding the AUD/USD exchange rate.

EUR/USD Struggles as Market Reacts to Trump's Tariff Plan

EUR/USD hovered near 1.0499 as renewed fears of a global trade war and weakening US economic data undermined the greenback. The Conference Board's Consumer Confidence Index decreased by 7 points in February to 98.3, representing its third consecutive decline. US house prices increased by 4.5% between Q4 2023 and Q4 2024. Quarterly, house prices rose by 1.4% compared to Q3 2024. The manufacturing index rose to 6 points, exceeding forecasts, which had anticipated a contraction of -3 points. This marked an improvement from the previous month, where the Richmond manufacturing index had recorded a contraction of -4 points in January, revealing that the manufacturing sector index recorded its first positive reading since October 2023.

On the policy front, Federal Reserve Bank of Richmond President Thomas Barkin anticipated a decline in Personal Consumption Expenditure (PCE) inflation later this week, noting the Fed's significant progress in controlling inflation. Despite this optimism, he stressed the need for a "wait and see" approach amid ongoing policy uncertainty. Meanwhile, US President Donald Trump confirmed that his planned 25% tariffs on Canada and Mexico, initially delayed for a month, will go ahead on March 4. "The tariffs are going forward on time, on schedule," Trump stated from the White House.

The shared currency outperformed its peers as investors shifted their focus to the European Central Bank's (ECB) policy meeting decision. However, the victory of Germany's conservatives in the election and mixed economic indicators could limit the euro's upside. Germany's GfK Consumer Confidence Survey dropped to -24.7 for March 2025, down from a revised -22.6 and below expectations of -21.4. GDP data revealed a 0.2% quarter-on-quarter contraction in Q4 2024. The outcome of Germany's federal election, with no clear majority, adds further uncertainty to the euro, as the conservative Christian Democratic Union (CDU), led by Friedrich Merz, won the election. Investors closely watch how the CDU forms a coalition government to address the fragile economy. Meanwhile, ECB board member Isabel Schnabel highlighted a rise in the Euro area's natural interest rate, suggesting a lasting shift in inflation dynamics.

In the upcoming sessions, US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) data for January, along with the Eurozone's economic docket – including CB Monetary Policy Meeting Accounts, German Prelim CPI data, and German Unemployment Change – will influence the EUR/USD exchange rate.

NZD/USD Pressured by US Tariffs Concerns

NZD/USD depreciated near 0.5696 due to the cautious sentiment of traders ahead of New Zealand's February consumer confidence report and official PMI reading from key trading partner China. The Chinese government's recent annual policy statement for 2025 highlighted reforms aimed at revitalising the agricultural sector and improving food security due to challenges like US tariffs, economic slowdown, and climate change. Although China's stimulus measures benefit the Kiwi, the domestic Trade Balance data and the Reserve Bank of New Zealand's (RBNZ) position may challenge the currency. The latest minutes from the monetary policy meeting suggested further policy easing. RBNZ Governor Adrian Orr indicated a potential 50 basis point reduction in the Official Cash Rate (OCR) by mid-year, likely in July, in two 25-bps increments.

Recent economic data showed New Zealand's retail sales grew by 0.9% in December 2024, followed by a revised 0.0% in September. Core retail sales rose 1.4%, reversing a 0.8% decline in the previous quarter. Total retail sales increased to NZD 25.9 billion, with ten industries reporting higher sales. New Zealand posted a trade deficit of NZD 486 million in January 2025, compared to a revised surplus of NZD 94 million in December. Exports dropped to NZD 6.19 billion, down from NZD 6.67 billion, while imports rose to NZD 6.8 billion from NZD 6.62 billion.

On Tuesday, Thomas Barkin, President of the Federal Reserve Bank of Richmond, projected another decline in Personal Consumption Expenditure (PCE) inflation later this week, highlighting the Fed's significant progress in tackling inflation, fluctuating the greenback. However, despite his optimistic outlook, Barkin emphasised the need for a cautious "wait and see" approach given ongoing policy uncertainties. The soft US Conference Board's Consumer Confidence Index dampened investor sentiment, increasing dollar selling pressure. The index fell to 98.3 in February from 105.3 in January, the largest decline since August 2021. The University of Michigan Consumer Sentiment Index also dropped to 64.7, below the forecast of 67.8. Additionally, five-year consumer inflation expectations rose to 3.5%, exceeding the consensus of 3.3%.

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