GBP/USD Rebounds Ahead of Fed Interest Rate Decisions

GBP/USD recovered near 1.2992, as growing trade concerns and fears around a potential economic slowdown undermined the greenback. Recent weak economic data, along with market anticipation that Trump’s tariff could boost inflationary pressures within the country could provoke anxious market sentiment, adding selling pressure to the dollar. Monday’s Retail Sales increased by 0.2% month-on-month in February, falling short of the anticipated 0.7%. This followed a revised decline of -1.2% in January (previously -0.9%). On an annual basis, retail sales grew by 3.1%, down from the revised figure of 3.9% in January, which was initially 4.2%. Friday’s Flash University of Michigan’s (UoM) survey of consumers revealed that respondents see five-year consumer inflation expectations at 3.9%, up from the 3.5% projected in February. The preliminary Michigan Consumer Sentiment Index arrived significantly lower at 57.9 in March, compared to estimates of 63.1 and the previous reading of 64.7.

Softer-than-expected US Retail Sales added to persistent concerns about the potential slowdown in consumer spending, shaping the market sentiment around the Federal Reserve’s (Fed) monetary policy stance. On Monday, Trump commented on his social media, “Tomorrow morning, I will be speaking to President Putin concerning the War in Ukraine. Many elements of a Final Agreement have been agreed to, but much remains. Thousands of young soldiers and others are being killed. Each week brings 2,500 soldier deaths from both sides, and it must end NOW. I look very much forward to the call with President Putin,” steering global markets.

On the other hand, Sterling faltered after the Organisation for Economic Co-operation and Development (OECD) lowered its 2025 growth forecast for the UK, raising renewed concerns about the country’s economic direction and sparking speculation that Chancellor Rachel Reeves could announce spending cuts in next week’s Spring Statement. The recent contraction in the UK’s monthly Gross Domestic Product (GDP) and a notable drop in Industrial and Manufacturing Production for January have heightened worries regarding the economic future. During the February policy meeting, the Bank of England also reduced its GDP growth forecast to 0.75%.

Investors will keenly watch for the monetary policy statement from both the Fed and BoE, along with the speeches by BoE Governor Andrew Bailey and Fed Chairman Jerome Powell, to gain more insights on the GBP/USD exchange rate.

EUR/JPY Rallied on Ukraine Peace Talk Optimism

EUR/JPY edged higher near 163.89 due to a softer yen, as optimism over China’s stimulus measures and hopes for a Ukraine peace deal diminished the currency’s safe-haven appeal. However, the Bank of Japan’s (BoJ) stance on increasing global uncertainty could impact the upcoming interest rate decision, influencing market expectations and adding volatility to the yen. Positive results from the Shunto spring wage negotiations, where firms largely agreed to union demands for robust wage growth for the third consecutive year, supported these expectations. Alongside concerns over a potential global trade war, these factors should help mitigate deeper losses for the yen. Last week’s economic data revealed that Japan’s largest trade union group, Rengo, secured an average wage increase of 5.46% for the fiscal year 2025, though it fell short of the 6.09% target set by unions.

On Tuesday, Japan’s Finance Minister Katsunobu Kato stated that “we will respond appropriately, bearing in mind that the market should be allowed to decide market moves.” He also added that “bond markets should decide on rate moves” after the 40-year government debt yield briefly jumped to a record high. Moreover, the Ukraine peace deal ahead of talks between US President Donald Trump and Russian President Vladimir Putin continues to feed the positive global risk sentiment, undermining the safe-haven JPY.

On the other hand, the euro strengthened, bolstered by cautious optimism about potential peace talks between US President Donald Trump and Russian President Vladimir Putin regarding Ukraine and a crucial German spending plan vote due today. The CDU/CSU coalition, headed by elected victor Friedrich Merz, is anticipated to gain the two-thirds parliamentary majority required to implement proposed reforms. These reforms involve exempting defence expenditures from debt restrictions and initiating a €500 billion infrastructure investment strategy, which is expected to be approved by the lower and upper houses of Germany’s parliament. Apart from escalating concerns over the global trade war, Wednesday’s BoJ policy decision and the German ZEW Economic Sentiment Index will be crucial in determining the EUR/JPY exchange rate.

AUD/USD Tumbles Amid Escalating Geopolitical Tensions

The Australian Dollar lost ground against the greenback, trading near 0.6387, amid rising geopolitical tensions in the Middle East. The US reaffirmed its commitment to targeting Yemen’s Houthis until they cease attacks on Red Sea shipping, further unsettling markets. US President Donald Trump warned on Monday that he would hold Iran accountable for any actions by the Houthi group it supports in Yemen. The Trump administration has since expanded its largest military operation in the Middle East since Trump returned to office. Additionally, Trump stated that he would speak with Russia’s Vladimir Putin early Tuesday to discuss ending the Ukraine war, with territorial concessions by Kyiv and control of the Zaporizhzhia nuclear power plant expected to feature prominently in the talks. Moreover, downbeat US economic data and rising uncertainty over Trump’s tariff continue to pressure the US dollar. Recent US Retail Sales rose less than expected, indicating concerns about a potential slowdown in consumer spending, fuelling the market anticipation that the Federal Reserve (Fed) will continue to hold its current policy stance in the upcoming FOMC meeting.

In contrast, US President Donald Trump has opted to sustain a 25% tariff on Australian aluminium and steel exports, amounting to nearly $1 billion. This decision further complicates Australia’s trade prospects and impacts its exports. However, Australian Prime Minister Anthony Albanese confirmed that Australia will not impose reciprocal tariffs on the US. He emphasised that such retaliatory measures would merely raise costs for Australian consumers and contribute to inflation.

On Monday, Reserve Bank of Australia (RBA) Assistant Governor (Economic) Sarah Hunter signalled at the central bank’s cautious monetary policy stance, highlighting the need to monitor US policy decisions and their impact on inflation in Australia. On the data front, China’s economic data and monetary stimulus measures strengthened the Aussie. China’s retail sales increased by 4.0% year-on-year in January and February, up from December’s 3.7% rise. Meanwhile, industrial production climbed 5.9% year-on-year during the same period, surpassing the 5.3% forecast but slightly below the prior reading of 6.2%. On Sunday, China’s State Council announced a distinct action plan to stimulate domestic consumption and introduced measures to enhance household incomes. Additionally, Shenzhen has relaxed its housing provident fund loan policies to revitalise the property market and tackle the surplus. Positive economic indicators from China, coupled with improved market sentiment regarding the country’s initiatives to stimulate consumption—intended to raise wages, increase household spending, and stabilise the stock and real estate markets—are bolstering overall market confidence in the region.

Broader market sentiment regarding Trump’s tariffs and the Fed’s monetary policy decision will influence the AUD/USD’s movements.

EUR/USD Rallied on Softer USD

EUR/USD increased to 1.0944 as USD wobbled ahead of the Federal Reserve’s (Fed) interest rate decision. Weaker-than-anticipated US Retail Sales data and a slowdown in consumer spending have provoked market anticipation around the Fed’s policy stance. In February, retail sales rose by 0.2% month-over-month, which was lower than the market expectation of 0.7%. This increase followed a revised drop of -1.2% in January, which was previously reported as -0.9%. Year-over-year, retail sales increased by 3.1%, down from a revised 3.9% in January (previously reported at 4.2%). On Friday, the University of Michigan (UoM) revealed a decrease in its preliminary Consumer Sentiment Index for March, which fell to 57.9, marking the lowest point since November 2022, down from 64.7. This reading was also below the consensus estimate of 63.1. Additionally, the UoM’s five-year Consumer Inflation Expectation rose to 3.9% in March, up from 3.5% in February. While market participants expect Trump tariffs to be a trigger for inflation and may cause economic turbulence for the global economy, it also forced global organisations to slice US Gross Domestic Product (GDP) growth forecasts. The US has enacted tariffs on steel and aluminium, prompting the EU to propose retaliatory measures, while Trump has committed to a 200% retaliatory tariff on European wine and spirits, pressuring the euro.

However, market optimism around the Greens’ signal to the German debt restructuring deal could limit the downside of the shared currency. Friedrich Merz, the German Chancellor-in-waiting, has consented to establish a 500 billion Euro infrastructure fund along with significant modifications to borrowing regulations or an extension of the ‘debt brake’. These measures are intended to secure the package’s endorsement in the lower house of Germany’s parliament on Tuesday and in the upper house on Friday. Marketers expect the surge in Germany’s borrowing limit to boost economic growth and inflation, benefiting the Euro as Germany drives the Eurozone. Positive sentiment regarding the German debt agreement has heightened hopes that the European Central Bank (ECB) may pause its monetary easing cycle after six interest rate cuts since June 2024. On Friday, ECB policymaker and Austrian Central Bank Governor Robert Holzmann suggested that the central bank could keep interest rates steady during the April policy meeting, expressing concerns that US President Donald Trump’s tariff policies and increased defence spending might contribute to rising inflationary pressures.

Investors will focus on the US-Russia discussions regarding a ceasefire in Ukraine. Last week, Ukraine accepted a 30-day ceasefire proposal following talks with US representatives in Saudi Arabia. On Monday, Kaja Kallas, the EU Foreign Policy Chief, remarked that Russia’s terms for a ceasefire indicate that Moscow is not genuinely interested in achieving peace. Also, today’s German ZEW Economic Sentiment Index and speculation around the Fed’s interest rate decisions will drive the EUR/USD exchange rate.

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