EUR/GBP Sinks Ahead of ECB Rate Decision

EUR/GBP weakened to 0.8593 as investors braced for the European Central Bank (ECB) interest rate decision. The market speculates that the ECB will reduce its key borrowing rates by 25 basis points (bps), pushing the Deposit Facility Rate and the Main Refinancing Operations Rate lower to 2.25% and 2.4%, respectively. Wednesday’s final readings from Eurostat indicated that the Eurozone’s headline inflation eased to 2.2% year-on-year in March, down from 2.6% the previous month. Meanwhile, core inflation, which excludes volatile components such as energy and food, fell to 2.4%, marking the lowest level since January 2022. Controlled inflationary pressures and fears of economic shocks in an already slowing economy paved the way for further monetary policy easing by the ECB. Investors will closely examine the policy statement to understand how the ECB anticipates the United States’ new trade regime will affect the inflation outlook and growth potential in the European Union (EU). Attention will also shift to the press conference by ECB President Christine Lagarde as market participants look for fresh cues on monetary policy and the economic outlook. Any hints of a restrictive policy stance will suggest the probability of further policy easing this year.

On the other hand, softer-than-expected UK CPI data for March undermines the sterling. The Office for National Statistics (ONS) reported that the headline CPI grew at a moderate pace of 2.6% year-on-year, compared to estimates of 2.7% and the February reading of 2.8%. In the same period, the core CPI, which excludes volatile items such as food, energy, alcohol, and tobacco, rose by 3.4%, as anticipated, slower than the previous reading of 3.5%. Month-on-month, headline inflation increased by 0.3%, which is softer than estimates and the prior 0.4%. Inflation in the services sector, closely monitored by Bank of England (BoE) officials, decelerated to 4.7% year-on-year, down from the previous release of 5%. On Tuesday, the ONS announced that the ILO Unemployment Rate remained at 4.4% for the three months leading to February, matching market forecasts. The report indicated that the number of individuals claiming jobless benefits rose by 18.7K in February, compared to a revised increase of 16.5K in January, surpassing the expected figure of 30.3k. February’s Employment Change was reported at 205K, up from 144K in January. Average Earnings, excluding Bonuses, in the UK grew by 5.9% year-on-year (YoY) for the three months ending in February, compared to a revised growth of 5.8%, while markets expected 6%. Average Earnings, including Bonuses, experienced a 5.6% increase during this timeframe after a revised 5.6% rise in the previous quarter, exceeding the estimated 5.7%. On the policy front, softer consumer inflation data combined with a bleak UK labour market outlook due to increased employer contributions to social security schemes could impact market expectations that the BoE will lower interest rates at the May monetary policy meeting.

In today’s session, the BoE Credit Conditions Survey and the European Central Bank (ECB) interest rate decision will be key drivers of the EUR/GBP exchange rate.

USD/CAD Gains as BoC Maintains Policy Rate

USD/CAD edged higher near 1.3885, following the Bank of Canada (BoC) decision to hold its benchmark rate steady at 2.75% at its April meeting on Wednesday, marking its first pause after seven consecutive cuts. The Central Bank has shifted its policy stance from “dovish” to “hold” as it analyses the impact of Trump’s trade policies on the Canadian economic outlook. During the policy meeting, BoC Governor Tiff Macklem commented, “We will proceed carefully and be less forward-looking than usual until the situation becomes clearer,” warning that the available data is increasingly pointing to a “considerable slowing in business investment and household spending” in the face of reciprocal tariffs by US President Trump. On the data front, data revealed by Statistics Canada exhibited easing inflationary pressures, with the Consumer Price Index (CPI) falling to 2.3% yearly in March from 2.6% in February. CPI rose 0.3% month-over-month following the 1.1% increase recorded in February. The Bank of Canada’s (BoC) core CPI, excluding volatile food and energy prices, increased by 2.2% from 12 months to March, well below the 2.7% increase recorded in the previous month.

On the greenback front, the US Dollar Index (DXY), which tracks the US Dollar (USD) against a basket of six major currencies, stabilised following the robust consumer spending data. According to the US Census Bureau, Retail Sales increased by 1.4% in March, reaching $734.9 billion. This was an improvement over the 0.2% growth observed in February and slightly exceeded the market expectation of a 1.3% rise. Annually, Retail Sales grew by 4.6%. However, the cautious market mood that US economic policies may lead the US economy to a recession continues to undermine the greenback. President Trump’s decision to undertake a detailed investigation of the potential tariffs on key minerals, especially in industries such as copper, pharmaceuticals, lumber, and semiconductors, emphasises concerns over the US’s limited domestic production capacity in strategic sectors, further escalating the trade rift with China.

In his recent speech at the Economic Club of Chicago, Federal Reserve Chair Jerome Powell remarked on the economic outlook for the US, noting that the economy remains “solid” despite increased uncertainty and downside risks. He emphasised that the Fed is ready to wait for more clarity before making any policy adjustments, pointing to near-maximum employment and inflation slightly above the 2% target, which has significantly moderated.

In the upcoming sessions, investors will look forward to the US economic docket, including the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, and housing market data, for further insights on USD/CAD movements.

GBP/JPY Retreats on Disappointing Japan’s Export Data

GBP/JPY hovered near 188.88, as disappointing export data from Japan for March weakened the Japanese Yen (JPY). Export growth increased by only 3.9% year-on-year, reaching JPY 9,847.8 billion, which is below the anticipated 4.5% rise. This represents a marked deceleration from the 11.4% spike seen in February, a period that benefited from US steel and aluminium tariffs. Japan’s Economy Minister Ryosei Akazawa remarked that foreign exchange matters are not included in the current trade discussions in Washington. Japan is advocating for the complete elimination of the tariffs imposed during the Trump administration, which comprise a 10% basic tariff and an extra 25% charge on car exports. Akazawa expressed that Japan aims to reach a mutually beneficial agreement promptly, also highlighting that the US seems eager to finalise a deal within the ongoing 90-day negotiation period. Global risk sentiment sees a slight uptick thanks to hopes for US tariff negotiations, which significantly affect traditional safe-haven assets like the JPY. However, uncertainty regarding President Trump’s tariff announcements, the intensifying US-China trade conflict, and fears of a global recession may dampen market optimism. On another note, forecasts that Japan will secure a trade deal with the US, along with speculation that the Bank of Japan (BoJ) will raise interest rates, provide support for the yen.

On the sterling front, the UK’s softer-than-expected CPI data for March negatively affects the sterling. The Office for National Statistics (ONS) revealed that the headline CPI increased moderately by 2.6% year-on-year, below the estimated 2.7% and down from February’s 2.8%. Meanwhile, the core CPI, excluding volatile items like food, energy, alcohol, and tobacco, rose 3.4%, as expected, though it was slower than the previous 3.5%. Month-on-month, headline inflation climbed by 0.3%, which is weaker than both estimates and the prior 0.4%. Inflation in the services sector, which the Bank of England (BoE) watches closely, slowed to 4.7% year-on-year, down from 5% previously. On Tuesday, the ONS reported that the ILO Unemployment Rate held steady at 4.4% for the three months leading to February, aligning with market forecasts. The report also indicated an increase in jobless claims by 18.7K in February, compared to a revised increase of 16.5K in January, exceeding the expected rise of 30.3k. February’s Employment Change was recorded at 205K, an increase from January’s 144k. Average Earnings, excluding Bonuses, in the UK rose by 5.9% year-on-year for the three months ending in February, compared to a revised 5.8% growth, though markets had anticipated 6%. Average Earnings, including Bonuses, also saw a 5.6% increase during this period, matching the revised figure of 5.6% from the previous quarter, surpassing the estimated 5.7%. Regarding policy, the combination of weakening consumer inflation data and a challenging UK labour market outlook, attributed to heightened employer contributions to social security, may shape market expectations that the BoE will reduce interest rates during the May monetary policy meeting.

With no further economic releases scheduled this week from either region, broader risk sentiment around ongoing global trade concerns will likely guide the GBP/JPY exchange rate.

AUD/USD Rebounds on Improved Sentiment

AUD/USD recovered near 0.6352 as recent Australian labour market figures put pressure on the Australian Dollar. On Thursday, the Australian Bureau of Statistics (ABS) reported that the Unemployment Rate climbed to 4.1% in March from 4.0% in February, well below the predicted 4.2%. Australian Employment Change printed at 32.2K in March, an improvement from -57.5K in February, compared with the consensus forecast of 40k. The participation rate in Australia increased to 66.8% in March, up from 66.7% in February. Meanwhile, Full-Time Employment rose by 15K in the same period, recovering from a decline of 43.8K in the previous reading. Part-time employment increased by 17.2K in March, compared to -13.7K prior.

On the policy front, the Reserve Bank of Australia’s (RBA) April policy meeting minutes indicated the uncertainty around the timing of the upcoming interest rate adjustment. Meanwhile, the market anticipates the 25 bps rate reduction in the May meeting, with up to 125 bps of policy easing over the next year. Improved global risk sentiment following US President Donald Trump’s decision to exclude key technology items from newly suggested “reciprocal” tariffs further supported the risk-sensitive Aussie. These exempt products, including smartphones, computers, semiconductors, solar cells, and flat-panel displays, are manufactured in China. In the first quarter of 2025, China’s economy expanded at an annual rate of 5.4%, consistent with the growth experienced in Q4 2024 and exceeding the market expectation of 5.1%. On a quarterly basis, GDP increased by 1.2% in Q1, compared to a 1.6% rise in the prior quarter, while underperforming the projected 1.4% increase. Additionally, China’s retail sales rose significantly by 5.9% year-on-year, surpassing the anticipated 4.2% and up from February’s 4% growth. Industrial production also exceeded expectations, growing by 7.7% against the expected 5.6% and February’s reported 5.9%.

Conversely, cautious market sentiment about the US administration’s tariff plans continued to weigh on the US dollar. Stronger-than-forecast US retail sales figures and Federal Reserve Chair Jerome Powell’s speech failed to lift the greenback. In March, US Retail Sales rose by 1.4%, surpassing last month’s 0.2% increase and the anticipated 1.3% growth. A recent survey by the Federal Reserve Bank of New York reveals a significant increase in households anticipating rising inflation, worsening job prospects, and deteriorating credit conditions in the near future.

In the upcoming sessions, US Building Permits, Housing Starts, the Philly Fed Manufacturing Index, and weekly Initial Jobless Claims will shape the market sentiment around the AUD/USD exchange rate.