GBP/USD Wobbles on Soft US CPI Data

GBP/USD traded in a narrow range near 1.3307, following softer-than-expected US inflation data. On Tuesday, the US Bureau of Labour Statistics (BLS) announced that the Consumer Price Index (CPI) fell to 2.3% year-over-year in April, down from 2.4% in March. This figure was lower than the market’s expectation of 2.4%. The core CPI, excluding the more volatile food and energy prices, increased by 2.8% year-over-year, consistent with the figures from March and analysts’ predictions. The CPI and core CPI increased by 0.2% monthly. Despite the subdued market mood following the softer consumer inflation numbers, ongoing optimism around the US-China trade talks could boost the greenback. 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.” 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.

Conversely, stealing faces challenges in light of recent 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%. Catherine Mann, a policymaker with the Bank of England (BoE), remarked on Wednesday that “The UK labour market has shown greater resilience than anticipated.” He also expressed concerns regarding the rise in household inflation expectations.

The UK’s preliminary Q1 GDP, Industrial and Manufacturing Production data, US Producer Price Index (PPI) and the University of Michigan’s Consumer Sentiment Survey will significantly influence the GBP/USD exchange rate in the upcoming session.

EUR/GBP Rises on Upbeat German Data

EUR/GBP climbed to near 0.8421, as the German ZEW Economic Sentiment Index provided modest support to the euro. However, the ongoing disappointing components of current conditions offset the rise. The headline German ZEW Economic Sentiment Index rebounded to 25.2 in May from -14 in April, significantly surpassing the market consensus of 11.9. The Current Situation Index eased slightly to -82 during the same period, compared to the April reading of -81.2. Data exceeded the estimated reading of -77. The Eurozone ZEW Economic Sentiment Index rose to 11.6 in May, up from -18.5 in April, while market expectations were -3.5. On Wednesday, European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel stated that June’s interest rate decision will depend on incoming data. Nagel explained that they do not yet know the exact impact of tariffs on inflation and the economy, and he noted that new staff projections will be published next month. He added that central banks must adapt to managing uncertainty. Additionally, various officials from the European Central Bank (ECB) anticipate that the current policy review will endorse the present strategies, such as quantitative easing (QE), notwithstanding some internal disagreements. They also suggested that the ECB will maintain its use of phrases like “forceful action” in contexts of low interest rates and inflation.

On the other hand, cooling employment and softening wage growth have triggered expectations for rate cuts by the Bank of England (BoE), undermining the pound. The ILO Unemployment Rate, a three-month moving average of joblessness calculated by the International Labour Organisation, rose slightly to 4.5%, up from 4.4% and in line with forecasts. Meanwhile, the Claimant Count, which measures the number of people applying for unemployment-related benefits, increased by 5,200 in April. Although this is an increase, the figure was far better than the expected 22,300, suggesting some resilience. However, Employment Change, a metric tracking the net number of jobs added, slowed to 112,000 in March from 206,000 in February, indicating reduced hiring momentum. The most notable takeaway came from the Average Earnings Index, a gauge of wage inflation. Wages excluding bonuses rose 5.6% YoY, just under the forecast of 5.7%. Earnings, including bonuses, rose 5.5%, surpassing expectations of 5.2%. Despite rising optimism about easing price pressures, Bank of England Chief Economist Huw Pill cautioned on Tuesday that inflation may persist at unexpectedly high levels, potentially reinforcing the necessity to keep interest rates elevated. “I remain concerned that we have seen a sort of structural change in price and wage-setting behaviour, maybe driven by the type of things that were involved in models of the inflation process from the ’70s and ’80s.”

The upcoming preliminary Gross Domestic Product (GDP) for both regions will provide fresh insights into the EUR/GBP exchange rate.

EUR/USD Rebounds Following Cooling US Inflation

EUR/USD recovered near 1.1216, as bets around European Central Bank (ECB) interest rate cuts due to easing geopolitical tensions subsided, pressuring the euro. The headline German ZEW Economic Sentiment Index rebounded to 25.2 in May from -14 in April, significantly surpassing the market consensus of 11.9. The Current Situation Index eased slightly to -82 during the same period, compared to the April reading of -81.2. Data exceeded the estimated reading of -77. The Eurozone ZEW Economic Sentiment Index rose to 11.6 in May, up from -18.5 in April, while market expectations were -3.5. 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.” Additionally, the EU has prepared countermeasures should trade talks with the US not conclude positively, a move that could escalate trade tensions. On Thursday, the European Commission launched a public consultation paper outlining potential countermeasures affecting up to €95 billion of US imports if trade talks fail to yield satisfactory results for the bloc. On Tuesday, the German Harmonised Index of Consumer Prices (HICP) rose by 2.2% in April, compared to March’s reading and the consensus of 2.2%. On a monthly basis, the HICP increased by 0.5%, following a 0.5% rise in the previous month.

On the other hand, recent developments in the US-China trade talks, including news that the United States and China reached a preliminary agreement to significantly reduce tariffs following productive discussions over the weekend in Switzerland, continue to support the greenback. However, cooler-than-expected inflation numbers could exert pressure on the greenback. Data from the US Bureau of Labour Statistics (BLS) released on Tuesday indicated that the Consumer Price Index (CPI) rose by 2.3% year-over-year in April, down from 2.4% in March. This figure fell short of the market prediction of 2.4%. In addition, the core CPI, which omits the more volatile food and energy categories, increased by 2.8% annually in April, matching both the prior reading and the forecast of 2.8%. On a month-to-month basis, both the CPI and core CPI experienced a 0.2% increase in April.

In today’s session, the German Harmonised Index of Consumer Prices (HICP) and speeches by influential FOMC members will significantly influence the EUR/USD exchange rate.

AUD/JPY Weakens Amid RBA’s Rate Cuts Bets

AUD/JPY struggled near 95.15, due to the stronger Japanese Yen (JPY) following Bank of Japan (BoJ) Deputy Governor Shinichi Uchida’s hawkish remarks. On Tuesday, he emphasised that the central bank will keep the door open for further policy normalisation. However, the central bank will keep raising rates if the economy and prices improve as projected. As overseas economies recover, Uchida added further, Japan’s economic growth is expected to slow to around its potential before resuming moderate growth. On Tuesday, Japanese Finance Minister Katsunobu Kato spoke about the potential for a meeting with US Treasury Secretary Scott Bessent to discuss foreign exchange matters and the ongoing tariff negotiations. He stressed that Japan will closely monitor the US-China tariff discussions but refrained from commenting on currency valuations. The Summary of Opinions from the Bank of Japan’s (BoJ) monetary policy meeting on April 30–May 1 underscored ongoing uncertainty as a major concern. One member indicated that the central bank might continue increasing interest rates in response to economic progress and inflation. Another member emphasised maintaining the current rate-hiking strategy, stating that real interest rates remain significantly negative, while advocating for a careful evaluation of risks. Additionally, another member expressed worries regarding US trade policy, warning that elevated tariffs could significantly impact Japan’s economic outlook and inflation trajectory. Japan’s Producer Price Index (PPI) rose 0.2% in April, and the yearly rate came in at 4%, down from 4.2% in the previous month.

A stronger-than-expected domestic Wage Price Index and signs of reduced global trade tensions have boosted market sentiment regarding the Reserve Bank of Australia’s (RBA) policy stance, consequently supporting the Australian Dollar (AUD). In Q1 2025, Australia’s seasonally adjusted Wage Price Index increased by 3.4% year-over-year, up from a 3.2% rise in Q1 2024, exceeding market predictions of a 3.2% increase. This reflects a recovery from the previous quarter, which saw the slowest wage growth since Q3 2022. On a quarterly basis, the index rose by 0.9% in Q1, outpacing the anticipated 0.8% increase. Moreover, 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. On Tuesday, Australian Prime Minister Anthony Albanese was inaugurated for a second term following a significant election win. Important cabinet roles, such as treasurer, foreign affairs, defence, and trade, remain the same, reflecting the signs of political stability in the region.

In the upcoming sessions, Australian labour market data, along with preliminary growth figures from Japan, will be key drivers of the AUD/JPY movements.