The pound edged lower against the US Dollar, trading near 1.2287, as US President Trump's tariffs on Canada, Mexico, and China spooked global financial markets, redirecting investors to safe-haven assets. On Saturday, the US announced tariff numbers, imposing 25% tariffs on Canadian and Mexican goods, while Chinese exports would face a 10% tariff. Additionally, according to CTV, Canadian energy exports will be subject to a 10% tariff.

The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred measure of inflation, increased by 0.3% month-on-month in December, up from 0.1% in November. On an annual basis, PCE inflation rose to 2.6% from the previous 2.4%, while core PCE, excluding food and energy, remained stable at 2.8% year-on-year for the third consecutive month. The Chicago PMI for January was 39.5, slightly below the expected and up from the previous 36.9. Meanwhile, Initial Jobless Claims for the week ending January 24 were lower than anticipated. The number of individuals filing for jobless benefits for the first time was 207K, well below the estimated 220K and the previous figure of 223K.

Sterling faces additional challenges as market sentiment is confident about the dovish stance, anticipating a 25 bps rate cut to 4.5% by the BoE in its first policy meeting of the year, driven by slower-than-expected UK inflation, growing risks of soft labour demand, and a surprising decline in December's Retail Sales. Investors will pay close attention to the BoE's monetary policy decision next Thursday to gain more insights into the sterling's movements. In today's session, the US ISM Manufacturing Purchasing Managers' Index (PMI) and the revised S&P Global Manufacturing PMI data for January will influence the GBP/USD exchange rate.

EUR/GBP Struggles Due to Dovish BoE

EUR/GBP depreciates near 0.8319 as the euro remains subdued by growing expectations of further interest rate reductions by the European Central Bank (ECB). The ECB's decision to reduce the Deposit Facility Rate by 25 bps to 2.75%, while the Main Refinancing Operations Rate lowered to 2.9%, matched market expectations.

At the press conference after the policy decision, ECB President Christine Lagarde suggested that further easing remains feasible. She noted that the ECB is still in a "restrictive territory," and it is too early to predict when tightening will conclude. However, she did not specify a fixed path for interest rate cuts, stressing that decisions will be made based on data during each meeting.

On the economic front, downbeat Eurozone GDP and softer-than-expected CPI data injected market volatility into the euro. The Eurozone economy remained sluggish in Q4 2024 but was below the 1% forecast. The bloc's Gross Domestic Product (GDP) increased at an annual pace of 0.9% in Q4, matching Q3 but below the expected 1%. Unemployment rose to 6.3% in December, up from 6.2% in November. Flash German GDP data showed a 0.2% contraction in Q4, improving from a 0.3% decline in Q3. Germany's Retail Sales dropped 1.6% MoM in December, missing the forecast of a 0.2% rise, while YoY growth of 1.8% fell short of the expected 2.5%. On Monday, ECB policymaker François Villeroy de Galhau remarked that US President Donald Trump's tariffs would elevate economic uncertainty, describing it as a "very worrying development," signalling future rate cuts.

The market anticipates that the Bank of England (BoE) will resume its rate-cut cycle at the next policy meeting, continuing to weigh on sterling. The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers' Index climbed to 48.3 in January, up from December's 11-month low of 47.0 and slightly above the expected 48.2.

With no significant UK releases due at the start of this week, the broader market sentiment surrounding Eurozone CPI figures will drive the EUR/GBP pair.

USD/CAD Wobbles Following Trump Tariffs on Canadian Imports

USD/CAD traded near 1.4696 following the launch of US President Donald Trump's potential tariff trade war. On Saturday, Trump imposed 25% tariffs on Canadian and Mexican imports and 10% on goods from China, commencing on Tuesday, and asserted that they would remain in place until the countries controlled the flow of illegal drugs and immigrants into the US. Additionally, Canadian energy exports will face a 10% tariff. The Canadian November GDP printed below expectations at -0.2%, below the forecast of -0.1% and tumbling from the previous month's 0.3%.

Moreover, the Bank of Canada's (BoC) dovish decision to trim interest rates for the sixth time since June, lowering its primary reference rate to 3.0%, along with the end of its quantitative tightening programme, and anticipated asset purchases in early March, weighs on the CAD. Last week's comments from BoC Governor Tiff Macklem expressed concerns: "A big increase in tariffs is a big disruption to the Canadian economy. Monetary policy can't fix that," emphasising the central bank's limitations in mitigating potential trade war damage with the US.

BoC's dovish move could create an interest rate differential compared to the Federal Reserve's (Fed) hawkish pause, favouring the USD. On the data front, Friday's PCE Price Index rose 0.3% MoM in December, up from 0.1% in November, with annual inflation increasing to 2.6%. Core PCE remained steady at 2.8%. The Chicago PMI for January rose to 39.5, slightly below expectations. Initial Jobless Claims for the week ending January 24 were 207K, lower than the estimated 220K and the previous 223K.

In today's session, the US ISM Manufacturing PMI numbers and oil price dynamics could significantly influence the USD/CAD's movements.

EUR/USD Tumbles on Trump's Tariff Threats

The EUR/USD pair remains subdued around 1.0242 as disappointing German retail sales and the latest consumer price index for Germany revealed a sharper-than-expected slowdown in inflation. German inflation matched market expectations, as HICP declined by 0.2% MoM after a 0.7% rise in December. On an annual basis, HICP increased by 2.8%, aligning with expectations. The CPI rose by 2.3%, slower than the expected 2.6%, while Retail Sales in Germany fell by 1.6% MoM in December, missing the expected 0.2% rise. The unemployment rate rose to 6.3% in December from 6.2% in November.

The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, increased from 46.1 in December to an eight-month high of 46.6 in January. The headline HCOB Spain Manufacturing PMI declined to 50.9 in January, significantly lower than December's 53.3. The HCOB Italy Manufacturing PMI printed at 46.3, up from 46.2 but below the predicted 46.8, marking the tenth consecutive monthly deterioration in the manufacturing sector's health. The HCOB Germany Manufacturing PMI increased to 45.0 from 42.5 in December, reaching the highest level since May last year.

The Eurozone HICP rose 2.5% YoY in January, matching market expectations and up from 2.4% in December. Core HICP increased 2.7%, above the 2.6% forecast. On a monthly basis, HICP declined 0.3% in January, following a 0.4% drop in December.

The US dollar strengthened after President Trump reaffirmed his plans to implement tariffs on Canada and Mexico on Saturday. This increase was further supported by the recent core PCE price index, which showed that the Federal Reserve's favoured inflation metric remained persistently elevated in December.

The US dollar gained on President Trump's reaffirmation to impose 25% duties against Canada and Mexico and an additional 10% duty on China, enjoying the boosted safe-currency appeal from provoked concerns over a new global trade war. The recent core PCE price index, which reflects the Federal Reserve's preferred measure of inflation, remained persistently high in December, further supporting the greenback.

In today's session, US ISM manufacturing PMI and Eurozone's CPI figures could inject further volatility into the EUR/USD exchange rate.

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