EUR/GBP Spikes Following ECB’s 25 bps Rate Cut

EUR/GBP gained momentum near 0.8436 following the European Central Bank’s (ECB) decision to reduce interest rates to 2.0% from 2.25%, matching market anticipations. In its accompanying statement, the European Central Bank (ECB) pledged to stabilise inflation at its medium-term target of 2%. Projected headline inflation is expected to average 2.0% in 2025, 1.6% in 2026, and 2.0% in 2027. The ECB emphasised that, especially in the current conditions of exceptional uncertainty, it will adopt a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Interest rate decisions will be based on its assessment of the inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. Addressing ongoing trade concerns, the central bank highlighted that while uncertainty around trade policies may negatively impact business investment and exports in the short term, rising government investment in defence and infrastructure will increasingly bolster growth over the medium term. ECB President Christine Lagarde stated in a post-meeting press conference that monetary policy is “well-positioned,” although the current uncertain outlook is more pronounced than usual. Lagarde also mentioned that the central bank is close to concluding the easing cycle.

On the data front, Germany’s industrial sector activity fell more than anticipated in April, according to the latest figures published by Destatis on Friday. Industrial output dropped by 1.4% month-on-month, the federal statistics authority Destatis reported in seasonally and calendar-adjusted figures, against an expected 1% decline and a revised 2.3% growth reported in March. German industrial production decreased by 1.8% year-on-year in April, compared to March’s -0.7% revision. Separately, Germany’s trade balance for April was EUR 14.6 billion, compared to an anticipated EUR 20.2 billion and the previous EUR 21.2 billion.

On the sterling front, broader market expectations for the Bank of England’s (BoE) monetary policy outlook and the US-China trade discussions strengthen the British currency. BoE Governor Andrew Bailey reaffirms a “gradual and careful” approach to monetary expansion amid uncertainty in the global economic landscape. He commented, “I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty.” Moreover, the uncertain outlook surrounding the trade negotiations between Washington and Beijing continues to pressure the UK economy. Given that China maintains a low-cost competitive advantage worldwide, UK business owners could experience the strain of a price war in the international market if the world’s two largest nations fail to reach a trade agreement.

In the absence of British economic data, the broader market sentiment regarding the ECB’s interest rate decision and mixed economic numbers from the Eurozone will be key drivers for the EUR/GBP exchange rate.

USD/CAD Rebounds Ahead of US/Canada Employment Data

USD/CAD recovered near 1.3675 as investors opted for the cautious sentiment ahead of the release of official labour market data from the United States (US) and Canada for May. US employers are projected to have hired 130,000 new workers, which is lower than the 171,000 added in April. The unemployment rate is expected to remain steady at 4.2%. Average hourly earnings data, a crucial indicator of wage growth, is estimated to have risen by 3.7% year-on-year, slower than the 3.8% increase in April. Month-on-month wage growth is anticipated to reach 0.3%, which is faster than the previous reading of 0.2%. Weekly Initial Jobless Claims increased to 247,000, surpassing the anticipated 235,000, according to data from the US Department of Labour. On Wednesday, US ADP private sector employment grew by 37,000 in May, compared to a revised 60,000 increase in April, significantly below the market expectation of 115,000. The Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) dropped to 49.9 in May, down from 51.6 in April, which was unexpectedly weaker than the forecast of 52.0. The recent disappointing US ADP Employment Change and an unexpected decline in the Services PMI for May have affected the Federal Reserve’s (Fed) monetary policy outlook, fuelling market expectations of a rate reduction in the July meeting. The US Dollar rebounded sharply after President Trump expressed optimism in a post on Truth.Social, indicating that trade negotiations between Washington and Beijing will reach a harmonious resolution. “The call lasted approximately one and a half hours and resulted in a very positive conclusion for both countries. There should be no longer be any questions respecting the complexity of rare earth products,” Trump wrote.

On Loonie’s front, hopes around the US-Canada trade deal, along with the Bank of Canada’s (BoC) decision to stabilise the interest rate, bolster the Canadian dollar. The Prime Minister’s Office announced on Friday that Prime Minister Mark Carney spoke with Chinese Premier Li Qiang to discuss trade and bilateral relations. During the conversation, Prime Minister Carney and Premier Li exchanged views on the importance of engagement and agreed to establish regular channels of communication between Canada and China. They also discussed strengthening economic ties and enhancing trade between the two countries. Additionally, both leaders committed their governments to work collaboratively in addressing the ongoing fentanyl crisis.

On the financial front, Canadian economic activity contracted for a second month in May despite a rise in employment. The seasonally adjusted index increased to 48.9 from 47.9 in April, with a reading below 50 indicating decreased activity. Employment rose to an adjusted 51.1 from 48.0 in April, while the prices index declined to 66.9 from 70.0. The unadjusted PMI increased to 53.8 from 52.3. Canada recorded a ninth consecutive monthly trade deficit in November, smaller than expected, as exports rose faster than imports, and trade surplus with the US widened, data showed on Tuesday. Canada’s trade deficit reached C$7.1 billion ($5.2 billion) in April, up from C$2.3 billion. Total exports fell 10.8% in April, the lowest level since June 2023, marking a third straight monthly decline and the most significant percentage drop since December 2008, during the global financial crisis. Exports to the US plunged 15.7%, with car and light truck shipments down about 23%, while trade with other countries reached an all-time high. The Canadian labour market report is expected to show that firms laid off 15,000 workers in May after adding a mere 7,400 job-seekers in April. This indicates that business owners have paused their hiring processes, looking for clearer information on Trump’s tariff agenda. The unemployment rate is expected to have increased to 7% from the prior release of 6.9%.

Investors will focus on the labour market data from the United States (US) and Canada for fresh impetus on the USD/CAD exchange rate.

GBP/JPY Hovers Following Downbeat Japanese Data

GBP/JPY struggles near 194.96, as the disappointing release of Japan’s Household Spending data, along with optimism over the resumption of US-China trade talks, undermines the Japanese yen. Japan’s household spending unexpectedly fell by 0.1% year-on-year in April, compared to a 2.1% increase recorded in the previous month. Monthly spending declined more than anticipated, decreasing by 1.8% during the reported month. Japan’s real wages decreased by 2.3% year-on-year, marking a decline for the fourth consecutive month in April amid persistent inflation outpacing nominal wage growth. Meanwhile, nominal wages rose by 2.3% YoY, remaining consistent with March’s pace but falling short of market expectations of a 2.6% increase. The consumer inflation rate used to calculate real wages eased slightly to 4.1% YoY during the reported month, compared to 4.2% in March, although it stayed above 4% for the fifth consecutive month.

However, increasing expectations that the Bank of Japan (BoJ) will continue raising interest rates may bolster the yen. Japan’s Finance Minister, Katsunobu Kato, stated that the monetary policy decision rests with the Bank of Japan when questioned about the US Treasury report on exchange rates. On Thursday, the US Treasury Department indicated that the BoJ should persist with monetary tightening, claiming that this move would help normalise the yen’s weakness and foster a more balanced trade relationship. Japan is reportedly easing its position on the 25% US auto tariff and is now suggesting a flexible framework to lower the rate based on the contributions of different countries to the US auto industry. Japan’s chief tariff negotiator, Ryosei Akazawa, is currently in Washington for the fifth round of discussions with US officials.

Conversely, sterling gained due to a positive shift in market risk sentiment following the signing of US President Donald Trump’s executive order on Tuesday. The UK has been granted temporary relief from the new 50% US tariffs on steel and aluminium that came into effect on Wednesday. Under an executive order signed by President Trump, the UK will continue to face the previous 25% rate due to a preliminary trade agreement reached last month. In terms of monetary policy, traders have reduced their bets on another BoE interest rate cut this month because of rising inflationary pressures. S&P Global released the UK Composite Purchasing Managers’ Index (PMI), which increased to 50.3 in May, up from April’s reading of 48.5. This figure surpassed the preliminary estimate of 49.4. Meanwhile, the Services PMI also rose slightly to 50.9, suggesting modest but marginal growth.

Broader market sentiment around the rising US tariff tensions and weaker Japanese economic figures will drive the GBP/JPY exchange rate.

EUR/USD Sinks on Eurozone GDP, Retail Sales Data

EUR/USD declined to 1.1411 following the release of disappointing economic data from the Eurozone and Germany. In April 2025, the seasonally adjusted retail trade volume experienced a 0.1% rise in the euro area and a 0.7% increase in the EU. This compares to minor growth of 0.4% in the euro area and 0.3% in the EU in the preceding month. Year-on-year, the calendar-adjusted retail sales index improved by 2.3% in the euro area and 2.8% in the EU. For the first quarter of 2025, seasonally adjusted GDP grew by 0.6% in both the euro area and the EU, which is an increase from 0.3% and 0.4%, respectively, in the previous quarter. When compared with the same quarter last year, GDP increased by 1.5% in the euro area and by 1.6% in the EU, following prior rises of 1.2% and 1.4%. Employment also witnessed slight shifts: the number of employed individuals rose by 0.2% in the euro area while it remained unchanged in the EU during the first quarter of 2025. In the prior quarter, employment had seen an increase of 0.1% in the euro area and 0.2% in the EU. Germany’s industrial sector activity fell more than expected in April, according to the latest data published by Destatis on Friday. In the Eurozone’s economic powerhouse, industrial output dropped by 1.4% month-on-month, the federal statistics authority Destatis reported, with figures adjusted for seasonal and calendar effects, against an expected decrease of 1% and a revised 2.3% growth reported in March. German industrial production fell by 1.8% year-on-year in April, compared to March’s revised figure of -0.7%. Separately, Germany’s trade balance for April stood at EUR 14.6 billion, versus the expected EUR 20.2 billion and the previous EUR 21.2 billion.

On the policy front, the European Central Bank (ECB) decided to cut interest rates by 25 basis points, bringing the key Rate on Deposit Facility down to 2.0%, in line with market expectations. In its policy statement, the ECB detailed its meeting-by-meeting strategy for the future and updated its growth and inflation forecasts. Additionally, ECB President Christine Lagarde mentioned during a post-meeting press conference that monetary policy is “well-positioned,” although the current outlook remains unusually uncertain. She also indicated that the central bank is nearing the end of its easing cycle. ECB policymaker Francois Villeroy de Galhau remarked on Friday that “we have won the battle against inflation in Europe.” He added, “We have tools to react if there’s deflation.” Furthermore, ECB Governing Council member Gediminas Šimkus reiterated on Friday that “we have won the battle against inflation in Europe,” emphasising the importance of maintaining full flexibility.

Conversely, recent disappointing US ADP Employment Change figures and an unexpected decline in the Services PMI for May have impacted the Federal Reserve’s (Fed) monetary policy outlook, fuelling market expectations for a rate reduction in the July meeting and dampening the USD. The US NFP report is anticipated to show that the economy added 130K new workers, slightly fewer than the 171K hired in April. The unemployment rate is expected to remain steady at 4.2%. Meanwhile, Average Hourly Earnings, a key measure of wage growth, is estimated to have grown moderately by 3.7% year-on-year, compared to the prior reading of 3.8%. Month-on-month, the wage growth measure is predicted to have risen by 0.3%, quicker than the 0.2% observed in April. Federal Reserve (Fed) Board of Governors member Adrianna Kugler noted on Thursday that while growth remains firm (albeit subdued) and Fed policy appears to be stable at a moderate level, key risks are increasing, particularly regarding inflation and a growing bubble of layoff intentions from businesses and firms. Federal Reserve (Fed) Bank of Kansas City President Jeff Schmid adopted a slightly different stance from other Fed officials who also spoke on Thursday but remained focused on the overall challenges of manipulating Fed policy rates in an uneasy post-tariff environment.

On Thursday, US President Trump indicated via a post on Truth.Social that he had a productive call with Chinese leader Xi Jinping. “The call lasted approximately one and a half hours and concluded positively for both countries,” Trump wrote, mentioning that both nations would meet for the next round of trade talks, but he did not specify a timeframe. Positive comments from the Republicans have helped reassure investors and stabilise the dollar.

Upcoming US non-farm payroll figures, along with weaker economic data from the eurozone and the European Central Bank’s (ECB) interest rate decision, will influence market sentiment surrounding the EUR/USD exchange rate.