GBP/JPY Climbs as BoE Policy Decision Looms Large

GBP/JPY edged higher to 191.78, as investors brace for today’s Bank of England (BoE) monetary policy decision. Prevailing market sentiment that the BoE will slash its base interest rate by 25 bps, following the recent mixed economic data and ongoing tariff conflicts, may undermine the sterling. The seasonally adjusted S&P Global UK Services PMI Business Activity Index fell to 49.0 from 52.5 in March, marking its lowest point since January 2023. This drop signifies a decline in business activity for the first time since October 2023. Meanwhile, the headline S&P Global UK Construction Purchasing Managers’ Index, which is a seasonally adjusted measure of total industry activity, recorded a value of 46.6 in April, showing a slight rise from 46.4 in March. This represents the fourth consecutive month of declining construction activity. On Thursday, UK government officials confirmed that US President Donald Trump is expected to announce an outline of the US-UK trade deal. Trump announced via social media post: “Big News Conference tomorrow at 10:00 A.M., The Oval Office, concerning a MAJOR TRADE DEAL WITH REPRESENTATIVES OF A BIG, AND HIGHLY RESPECTED, COUNTRY. THE FIRST OF MANY!!!”

On Japan’s front, recent remarks from Trump confirm the big trade deal announcement in today’s session, boosting investor confidence and resulting in reduced demand for traditional safe-haven assets, which undermines the Japanese Yen (JPY). However, condensed optimism over US-China trade talks and heightened economic uncertainty led by Trump’s rapidly shifting stance on trade policies could inject volatility into the yen. Furthermore, geopolitical risks arising from the prolonged Russia-Ukraine war, conflicts in the Middle East, and a precarious military confrontation on the India-Pakistan border could restrict losses for the JPY. Recent minutes from the Bank of Japan’s (BoJ) monetary policy meeting held on March 18-19 revealed that the central bank remains prepared to raise interest rates further if inflation trends continue. However, policymakers emphasised caution due to global volatility arising from increased economic uncertainty related to US tariff policies. Meanwhile, BoJ Governor Kazuo Ueda stated that he is aware of the impact of rising food prices on underlying inflation. Additionally, expectations that sustained wage increases will bolster consumer spending and inflation in Japan suggest that the BoJ may not entirely abandon its rate-hike plans and could tighten further in 2025.

Broader market sentiment around the Bank of England’s (BoE) monetary policy decision and geopolitical conflicts will drive the GBP/JPY exchange rate.

EUR/GBP Struggles Amid US-UK Trade Deal Hopes

EUR/GBP hovered near 0.8502 amid market speculation that the Trump administration may soon announce a trade agreement with the United Kingdom. Recent social media posts citing “Big News Conference tomorrow at 10:00 A.M., The Oval Office, concerning a MAJOR TRADE DEAL WITH REPRESENTATIVES OF A BIG, AND HIGHLY RESPECTED, COUNTRY. THE FIRST OF MANY!!!” boosted the optimistic market sentiment. Current market outlook suggests the BoE may reduce its base interest rate by 25 bps due to recent mixed economic data and ongoing tariff disputes, potentially weakening the sterling. Investors will pay attention to the Monetary Policy Committee’s (MPC) decision, which will be accompanied by meeting minutes and the Monetary Policy Report (MPR), along with Governor Andrew Bailey’s speech in a post-decision press conference, which will provide insights into the sterling movement. On Thursday, UK Prime Minister Keir Starmer stated, “You will hear more from me later today about the US economic deal.” He further emphasised, “I will always act in the national interest.”

On the euro’s front, stronger-than-expected German economic data bolstered the euro, indicating positive momentum in the German economy. The Eurozone’s economic powerhouse, Germany, saw an unexpected increase in its industrial sector activity in March, as industrial output rose 3% month-over-month (MoM), according to the federal statistics authority Destatis. This surpassed the anticipated 0.8% increase and followed a 1.3% decline in February. Year-over-year (YoY) industrial production in Germany dropped 0.2% in March, as compared to February’s decline of -4.1%. Additionally, German factory orders exceeded expectations in March, indicating that the country’s manufacturing sector has gained momentum. Over the month, contracts for goods ‘Made in Germany’ increased 3.6% in March after reporting no growth in February, beating estimates of 1.3%. Germany’s industrial orders rose 3.8% YoY in March, in contrast to the preceding decline of 0.2%. Eurozone retail sales increased by 1.5% YoY in March, following a revised growth of 1.9% in February, as reported by Eurostat on Wednesday. Analysts had projected a 1.6% increase; however, retail sales dipped 0.1% monthly during the same period, down from February’s revised +0.2%, falling short of the forecast of 0%.

Moreover, Germany’s political stability, following Conservative leader Friedrich Merz’s swearing-in as Chancellor in a second attempt, further supports the shared currency. The European Union reportedly will propose tariffs on Boeing aircraft if talks with the US fail, raising the risk of a further escalation of trade conflict.  The Bank of England’s (BoE) interest rate decision and German economic data will influence the EUR/GBP exchange rate in today’s session.

AUD/USD Sinks Due to the Fed’s Cautious Tone

AUD/USD lost momentum near 0.6414 following Fed Chair Jerome Powell’s press conference, during which he hinted that policymakers would remain patient. He mentioned that if circumstances change, the Fed can act “quickly as appropriate,” noting that their objectives wouldn’t be met “if tariffs remain.” Powell explained that if any of the mandates strays significantly from the Fed’s target, the central bank will decide which monetary policy tool to employ to mitigate the risks related to both mandates. When asked which of the two requires more focus, he stated that it is too early to determine. On the data front, the US Commerce Department announced that the Balance of Trade was $-140 billion worse than anticipated, reaching a total of $-137 billion, surpassing February’s figure of $-123.2 billion. Imports totalled $419 billion, with a notable contribution from consumer goods, particularly pharmaceuticals, driving this rise. Meanwhile, exports saw a modest increase to $278.5 billion.

US Treasury Secretary Scott Bessent is set to meet with China’s leading economic official in Switzerland this Saturday to reignite stalled trade discussions. The AUD has also gained momentum from China, Australia’s leading trading partner, due to Beijing’s increased stimulus initiatives to enhance economic growth amid trade-related difficulties. However, the Australian Dollar (AUD) continues to be supported by optimism over a possible breakthrough in US-China trade relations, given Australia’s significant trade ties with China. Further buoying sentiment, the People’s Bank of China has announced plans to lower key lending rates and reduce banks’ reserve requirements to spur economic growth. Domestically, in March, the AiG Industry Index increased by 7.2 points to -15, adjusted for seasonality, indicating a slight improvement despite ongoing challenges in the industrial sector. Issues like global trade uncertainty, currency fluctuations, and the upcoming federal election continued to affect activity. At the same time, the AiG Manufacturing Purchasing Managers’ Index (PMI) rose by 3.0 points to -26.7, an increase from -29.7 in the prior month. Moreover, market sentiment that the Reserve Bank of Australia (RBA) will opt for the policy easing approach by reducing the cash rate by 25 bps to 3.85% later this month may fluctuate the Aussie.

In today’s session, optimism over a US-China trade deal and the Fed’s hawkish stance will shape the market’s anticipations around the AUD/USD exchange rate.

EUR/USD Subdued Following Cautious Fed Disappoints Markets

EUR/USD weakened near 1.1292, following the Federal Reserve’s decision to maintain the interest rate at 4.5%, highlighting persistent inflation and increasing risks to both sides of its dual mandate. Fed Chair Jerome Powell provided more details on the outlook, stating that he “can’t confidently say” what the correct rate path should be and that the Fed is “not in a situation where we can cut preemptively.” He highlighted the necessity for additional data and reiterated the importance of patience, mentioning that the current policy stance is “modestly restrictive.” In the context of the positive sentiment surrounding US-China trade talks, President Donald Trump’s remarks about a significant trade deal announcement later today elevated investors’ confidence, supporting the greenback.

Conversely, positive German economic indicators and the political stability brought by Conservative leader Friedrich Merz’s second swearing-in as Chancellor enhance the euro’s stability. Eurozone retail sales rose by 1.5% year-over-year in March, following a revised growth of 1.9% in February, as reported by Eurostat on Wednesday. Analysts had projected a 1.6% increase. However, retail sales on a monthly basis dipped 0.1% in the same period, a decline from February’s revised +0.2%, and fell short of the forecast of 0%. Meanwhile, Germany’s Federal Statistics Office disclosed that factory orders surged more than anticipated in March, indicating a strengthening in the manufacturing sector. Orders for goods labelled ‘Made in Germany’ increased by 3.6% in March after showing no growth in February, surpassing the estimated rise of 1.3%. Year-over-year, Germany’s industrial orders advanced by 3.8% in March, bouncing back from a previous drop of 0.2%. In contrast, the German final services PMI edged down to 48.8 in April from 49.0 in March, reflecting a slight contraction and economic challenges. Additionally, the seasonally adjusted HCOB Eurozone Composite PMI Output Index decreased from 50.9 in March to 50.4, signalling more modest growth in business activity for the month. The Eurozone’s economic powerhouse, Germany, saw an unexpected increase in its industrial sector activity in March, as industrial output rose 3% month-over-month (MoM), according to the federal statistics authority Destatis. This surpassed the anticipated 0.8% increase and followed a 1.3% decline in February. Year-over-year (YoY) industrial production in Germany dropped 0.2% in March, compared to February’s decline of -4.1%. Germany’s trade balance for March came in at EUR21.1 billion compared to the EUR19.1 billion expected and EUR17.9 billion previously.

In today’s session, the US Weekly Initial Jobless Claims data, along with broader market sentiment around US tariff trade deals, will drive the EUR/USD exchange rate.