EUR/GBP Weakens Amid BoE’s Hawkish Tone

EUR/GBP lost ground near 0.8411, following the release of mixed employment data from the United Kingdom. The ILO Unemployment Rate rose to 4.5% in the three months ending in March, up from 4.4% in the quarter ending in February, according to data released by the Office for National Statistics (ONS) on Tuesday. The market had anticipated a 4.5% figure for the reported timeframe. Further details from the report revealed that the number of individuals claiming jobless benefits increased by 5.2K in April, compared to a downwardly revised decrease of 16.9K in March, which was better than the projected 22.3K. The Employment Change figure for March was 112K, lower than February’s 206K. Meanwhile, UK Average Earnings excluding Bonuses rose by 5.6% year-over-year (3M YoY) in March, down from a previously reported growth of 5.9%. Market expectations were for a 5.7% increase. Additionally, Average Earnings, including Bonuses, grew by 5.5% during the same period, following an upwardly revised 5.7% rise in the February quarter, surpassing the estimated 5.2%.

On the global front, recent positive developments surrounding the US-UK trade agreement, along with the Bank of England’s (BoE) gradual policy-easing approach, have strengthened the sterling. Last week, US President Donald Trump said that he would continue to impose a new 10% tariff on imports of most British goods but would reduce higher tariffs on imports of British cars, steel, and aluminium. On Monday, Bank of England (BoE) Deputy Governor for Monetary Policy, Clare Lombardelli, stated that “caution remains appropriate” regarding the policy outlook. He mentioned that the recent US-China discussions are positive news, but trade policy uncertainty will persist until a permanent resolution is achieved. Additionally, Bank of England’s external Monetary Policy Committee member Alan Taylor observed a notable sense of caution and unease among businesses, pointing out that the impact of the tariff shock has been greater than expected.

Conversely, growing expectations that the European Central Bank (ECB) may extend its monetary easing cycle in response to easing inflationary pressures continue to undermine the Euro. On Friday, ECB Executive Board member Isabel Schnabel presented a more cautious viewpoint during her speech at Stanford University. She emphasised that the current rates are suitable and should stay in neutral territory. Schnabel also cautioned about medium-term inflation risks that could exceed the ECB’s 2% target due to ongoing global economic disturbances. On Tuesday, Gabriel Makhlouf, a member of the ECB Governing Council and Governor of the Central Bank of Ireland, noted that “uncertainty is weighing on investment; soft data pointing to a significant cooling in business and consumer sentiment.” He remarked, “Global economic integration is now stalled, if not reversing; the past few weeks have accelerated the pace and scale of change. Even if a full-blown trade war proves to be short-lived, the effects of uncertainty will linger for some time.”

In today’s session, the UK labour market report, Bank of England (BoE) Governor Bailey’s speech, ZEW Economic Sentiment surveys for May from both Germany and the broader Eurozone, will shape the market sentiment around the EUR/GBP exchange rate.

AUD/USD Fluctuates Amid US-China Trade Truce

AUD/USD hovered near 0.6414, following China’s agreement to roll back higher import duties imposed after President Trump announced reciprocal tariffs on the so-called “Liberation Day” on April 2, bolstering the Australian dollar. As per the new tariffs, US tariffs on Chinese goods will decrease from 145% to 30%, while China will cut its tariffs on US imports from 125% to 10%, a move widely regarded as a significant step toward reducing trade tensions. Signs of easing global trade tensions have fuelled the market sentiment around the Reserve Bank of Australia (RBA) policy stance. Marketers now anticipate the RBA will decrease the cash rate to around 3.1% by the end of the year, expecting a 25 bps interest rate cut in its upcoming policy meeting. 

On the data front, Australia’s Westpac Consumer Confidence Index climbed 2.2% month-on-month to 92.1 in May, bouncing back from a 6.0% decline the prior month, and marking its third increase this year. China’s Consumer Price Index (CPI) fell 0.1% year-on-year in April, marking the third consecutive monthly decline and matching March’s drop, according to the National Bureau of Statistics. Meanwhile, the Producer Price Index (PPI) contracted 2.7% YoY in April, greater than March’s 2.5% decrease and below the expected 2.6% decline. In trade, China reported a $96.18 billion surplus in April, above the $89 billion forecast but down from March’s $102.63 billion. Exports increased 8.1% YoY, exceeding the 1.9% expectation but slowing from a 12.4% gain. Imports decreased 0.2% YoY, a lesser decline than the predicted -5.9% and March’s -4.3%. China’s trade surplus with the US shrank to $20.46 billion from $27.6 billion in March.

On the other hand, cautious market sentiment limits the upside of the US dollar as investors await the April US Consumer Price Index (CPI) report. On Tuesday, US Treasury Secretary Scott Bessent commented, “talks in Geneva with China resulted in a mechanism to avoid escalation.” He also added that President Trump aims to rebalance the US economy, while China needs to shift towards a consumption economy. He also emphasised the matter that “We do not want a generalised decoupling between the two largest economies in the world.” The market expects the headline CPI to increase to 0.3% month-on-month, up from -0.1%. Similarly, core CPI is predicted to rise to 0.3% from 0.1%. Both metrics are expected to show year-on-year figures that remain stable. An uptick in the annual headline CPI inflation print could provoke the market anticipation of stable interest rate bets in June’s policy meeting.

Broader market sentiment regarding the US-China trade truce and the upcoming Australian market data will drive the AUD/USD exchange rate.

USD/JPY Subdued Amid Persistent Uncertainty Over BoJ’s Policy Outlook

USD/JPY depreciated to near 147.92, due to the stable Japanese Yen (JPY) amid persistent uncertainty over the Bank of Japan’s (BoJ) interest rate outlook. BoJ Deputy Governor Shinichi Uchida acknowledged both potential upside and downside risks from possible US tariffs, indicating that such actions could impact Japan’s economy. He projected that Japan’s economic growth is likely to decelerate toward its potential rate before gradually improving, provided there is a recovery in overseas markets. Deputy Governor Uchida also highlighted increasing wages due to a tight labour market, suggesting that companies are expected to continue passing higher labour costs onto prices, which could bolster underlying inflation and inflation expectations over time. On Tuesday, Japanese Finance Minister Katsunobu Kato discussed the possibility of meeting US Treasury Secretary Scott Bessent to address foreign exchange issues and the ongoing tariff negotiations. He emphasised that Japan will remain vigilant regarding the US-China tariff discussions, although he declined to comment on currency levels.

The Summary of Opinions from the Bank of Japan’s (BoJ) monetary policy meeting held on April 30–May 1 highlighted ongoing uncertainty as a significant issue. One member suggested that the central bank may continue to raise interest rates in response to advancements in the economy and inflation. Another highlighted the importance of upholding the current rate-hiking approach, pointing out that real interest rates are still substantially negative, while urging a cautious assessment of risks. Additionally, a different member voiced concerns about the US trade policy, cautioning that higher tariffs could greatly affect Japan’s economic outlook and inflation path. In March, Japan’s non-seasonally adjusted current account surplus increased to JPY 3,678.1 billion, compared to JPY 3,447.8 billion in the same month last year, aligning closely with expectations. The balance of payments (BOP) indicated that the goods account surplus grew to JPY 516.5 billion from JPY 463.5 billion, attributed to a 1.8% year-on-year rise in exports, which exceeded the 1.3% increase in imports. Additionally, the current conditions index of the Economy Watchers’ Survey fell to 42.6 in April, down from 45.1 in March, reaching its lowest point since February 2022.

On the other hand, the US Dollar (USD) dipped ahead of the highly anticipated US Consumer Price Index (CPI) report for April, and recent developments in US-China trade talks. During the weekend, both nations achieved a preliminary agreement in Switzerland designed to considerably reduce tariffs, marking a move toward alleviating trade tensions. According to the agreement, the US will decrease tariffs on Chinese products from 145% to 30%, while China will reduce tariffs on US imports from 125% to 10%. This development has improved market sentiment and is regarded as a hopeful indicator for global trade stability. On Monday, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, expressed caution regarding the shifting trade policies of the Trump administration. In his interview, Goolsbee noted that the unpredictable tariffs and trade strategies from the White House have significantly disrupted hiring and investment plans across various industries, leading the Fed to adopt a wait-and-see approach concerning interest rates.

Investors will closely monitor the US Consumer Price Index (CPI) report for April and the temporary de-escalation in trade conflicts for further insights into the USD/JPY exchange rate.

GBP/JPY Remains Steady Amid Improved Market Mood

GBP/JPY stabilised near 195.42, amid improved US-China trade relations and a declining safe-haven demand for the Japanese yen. However, persistent uncertainty over the Bank of Japan’s (BoJ) interest rate outlook and supportive domestic data supported the yen. Bank of Japan Deputy Governor Shinichi Uchida noted both potential advantages and disadvantages of possible US tariffs, suggesting that these actions could influence Japan’s economy. He anticipated that Japan’s economic growth might slow down to its potential rate before steadily improving, contingent on a recovery in foreign markets. Uchida also pointed out rising wages attributed to a tight labour market, indicating that companies are likely to keep transferring increased labour costs onto prices, which may enhance underlying inflation and inflation expectations over time. On Tuesday, Japanese Finance Minister Katsunobu Kato mentioned the potential for a meeting with US Treasury Secretary Scott Bessent to discuss foreign exchange concerns and ongoing tariff negotiations. He underscored that Japan will stay alert regarding the US-China tariff discussions, although he refrained from commenting on exchange rates.

The Bank of Japan’s (BoJ) summary from the April 30–May 1 monetary policy meeting highlighted ongoing uncertainty. One member mentioned that the central bank may continue raising interest rates due to economic and inflation advancements. Another stressed maintaining the current rate-hiking approach, noting real interest rates are still significantly negative and called for a cautious risk assessment. Additionally, a member expressed concerns about US trade policy, warning that higher tariffs could significantly impact Japan’s economic outlook and inflation. In March, Japan’s non-seasonally adjusted current account surplus rose to JPY 3,678.1 billion, up from JPY 3,447.8 billion last year, meeting expectations. The balance of payments (BOP) showed the goods account surplus increased from JPY 463.5 billion to JPY 516.5 billion, due to a 1.8% year-on-year rise in exports, exceeding the 1.3% increase in imports. Also, the current conditions index of the Economy Watchers’ Survey dropped to 42.6 in April, down from 45.1 in March, its lowest since February 2022.

Sterling fluctuated after mixed employment data from the UK. The ILO Unemployment Rate rose to 4.5% for the three months ending in March, up from 4.4% in February, according to the Office for National Statistics (ONS) on Tuesday. The market had expected this figure. The report also showed that jobless claims increased by 5.2K in April, compared to a revised decrease of 16.9K in March, better than the projected 22.3K. Employment Change for March was 112K, lower than February’s 206K. Meanwhile, UK Average Earnings excluding Bonuses rose by 5.6% year-on-year in March, down from a previously reported 5.9%. Market expectations were for a 5.7% increase. Average Earnings, including Bonuses, grew by 5.5%, following a revised 5.7% rise in February, surpassing the estimated 5.2%. Recently, positive developments in the US-UK trade agreement and the Bank of England’s (BoE) policy easing have strengthened the sterling. Last week, US President Donald Trump announced he would maintain a new 10% tariff on most British goods but reduce tariffs on British cars, steel, and aluminium. On Monday, BoE Deputy Governor Clare Lombardelli stated that “caution remains appropriate” regarding the policy outlook. He noted that the recent US-China discussions are positive, but trade policy uncertainty will continue until a resolution is achieved. Additionally, BoE Monetary Policy Committee member Alan Taylor observed significant caution among businesses, highlighting that the tariff shock’s impact has been greater than expected.

In the absence of any market-moving data from Japan, the UK labour market report and Bank of England (BoE) Governor Bailey’s speech will influence the GBP/JPY exchange rate.