GBP/USD weakens near 1.2434 as soft UK economic data fuels concerns about stagflation amid persistent inflationary pressures and declining labour demand. Despite softer-than-expected CPI figures for December, inflation remains stubborn, with higher wage growth, energy prices, and imported raw material costs impacting consumers. Additionally, Chancellor Rachel Reeves' decision to increase employers' contributions to National Insurance (NI) in the Autumn Budget has negatively affected hiring momentum in the UK.

The US dollar strengthened following President Donald Trump's new tariff proposal targeting imports of computer chips, pharmaceuticals, steel, aluminium, and copper to encourage domestic manufacturing. Global tech stocks declined after concerns grew over Chinese company DeepSeek's AI model, which could disrupt the international market and compete with US chatbots like OpenAI and Meta.

With limited UK economic data, investors will focus on Durable Goods Orders, the Conference Board's Consumer Confidence Index, and the Richmond Fed Manufacturing Index for fresh direction in GBP/USD.

EUR/JPY Recovers Ahead of ECB Rate Decision

EUR/JPY recovered to 162.40, supported by speculation that the Bank of Japan (BoJ) will continue raising interest rates. The BoJ increased rates by 25 bps to 0.5% last Friday, marking the highest level since 2008. BoJ Governor Kazuo Ueda's recent comments suggest further rate hikes are possible if the outlook remains positive. The yen's safe-haven appeal is also heightened by uncertainties over potential trade tariffs, which could trigger market volatility and trade tensions.

On the euro front, expectations are rising that the European Central Bank (ECB) may cut interest rates in Thursday's meeting, which could weigh on the single currency. However, better-than-expected economic data from Germany may limit the currency's downside. Germany's IFO Business Climate Index rose to 85.1 in January, surpassing the forecasted 84.6, signalling an unexpected improvement in business sentiment. The IFO Expectations Index, which reflects firms' six-month projections, eased to 84.2 from 84.4, falling short of expectations.

Broader market sentiment surrounding BoJ's Monetary Policy Meeting Minutes and ECB's rate decision will drive EUR/JPY movements.

NZD/USD Subdued Amid Trump Tariff Threats

The NZD/USD is under pressure, trading near 0.5663, as renewed demand for the US dollar and risk-off sentiment weigh on the pair. Recent suggestions to impose tariffs on computer chips, pharmaceuticals, steel, aluminium, and copper have further dampened market sentiment. While the Federal Reserve is expected to maintain current interest rates during the January meeting, markets will closely monitor the Fed's future rate path, especially in light of Trump's comments: "With oil prices going down, I'll demand that interest rates drop immediately, and likewise, they should be dropping all over the world."

The New Zealand dollar (NZD) faces headwinds from weak Chinese economic data and dovish expectations regarding the Reserve Bank of New Zealand's (RBNZ) policy stance. China's NBS Manufacturing PMI fell to 49.1 in January from 50.1 in December, below the expected 50.1, and the NBS Non-Manufacturing PMI also declined. China's mixed PMI data and the government's new stimulus measures to boost index investment products have failed to support the kiwi. New Zealand Prime Minister Christopher Luxon reaffirmed the government's growth-focused approach for 2025.

With limited economic data for the NZD, the broader market sentiment around US economic data and Trump's tariff proposals will guide the NZD/USD exchange rate.

EUR/USD Falls on Upbeat German Sentiment

EUR/USD hovers near 1.0443, weighed down by cautious market sentiment as investors await key interest rate decisions from the Federal Reserve (Fed) and the European Central Bank (ECB). The euro received support from stronger-than-expected economic data from Germany and the Eurozone's preliminary Composite PMI for January. The Eurozone Manufacturing PMI rose to 46.1, exceeding expectations of 45.3, but Services PMI declined to 51.4 from 51.6, missing the consensus. The Composite PMI increased to 50.2, up from 49.6, reaching a five-month high. In Germany, the Manufacturing PMI rose unexpectedly to 44.1, its highest in eight months, and Services PMI increased to 52.5, a six-month high.

President Trump's recent comments regarding tariffs on key industries have revived fears of trade tensions, which weigh on the US dollar. The President's announcement to impose tariffs on steel, computer chips, aluminium, copper, and other semiconductors have added uncertainty to global markets.

Furthermore, ongoing disputes with Colombia over migrant deportations have led to concerns over potential global trade tensions.

In the upcoming week, investors will focus on durable goods orders, the Personal Consumer Expenditure Price Index (PCE), and the ECB's interest rate decision. ECB President Christine Lagarde's speech and the US economic docket, including Durable Goods Orders, the Conference Board's Consumer Confidence Index, and the Richmond Manufacturing Index, will guide EUR/USD movements.

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