GBP/JPY edges higher near 189.76, as BoJ Deputy Governor Shinichi Uchida remarks, "Japan's economy is experiencing a moderate recovery, though some weaknesses persist. The underlying inflation rate is gradually rising toward the 2% target," reinforced that the Bank of Japan (BoJ) will continue raising interest rates this year. Prime Minister Shigeru Ishiba's decision to reduce the FY25/26 budget plan to ¥115.2 trillion and new bond issuance to ¥28.6 trillion undermines JPY.

On the economic front, the latest Tokyo CPI report showed a slowdown in inflation. Headline Tokyo CPI rose 2.9% YoY in February, down from 3.4% in January. Core CPI (excluding fresh food and energy) increased by 2.2% YoY, below January's 2.5%. Tokyo CPI ex Fresh Food rose 2.2% YoY, missing expectations of 2.3% and declining from 2.5% in the previous month. The Statistics Bureau of Japan reported that the headline Consumer Price Index (CPI) for Tokyo, Japan's capital, slowed to 2.9% year-on-year (YoY) in February, down from 3.4% in January. Meanwhile, core CPI, which excludes volatile fresh food prices, eased more than expected, falling from 2.5% in January to 2.2% YoY in February. A further core gauge, excluding both fresh food and energy prices and used by the Bank of Japan to assess underlying inflation, remained stable at 1.9%, matching the previous month's figure. Japan's Industrial Production decreased by 1.1% month-on-month (MoM) in January, following a 0.2% decline in December, marking the third consecutive month of contraction. On a more positive note, Japanese retail sales rose by 3.9% YoY in January 2025 compared to January 2024, in line with market expectations and an improvement from December's 3.5% YoY growth. Retail sales also increased by 0.5% MoM from December 2024 to January 2025, slightly below the forecasted 0.6%, following a 0.8% drop the previous month.

Firm Market Anticipation that the Bank of England (BoE) Will Pursue a Moderate Policy-Easing Cycle Could Bolster the Pound. However, a remark by BoE Monetary Policy Committee Member Swati Dhingra endorses more aggressive monetary easing, continuing to exert pressure on the sterling. Furthermore, US President Donald Trump's meeting with UK Prime Minister Keir Starmer concluded with Trump promptly announcing the potential for trade tariffs on the UK unless the terms of a trade deal with the US are agreed upon within an unspecified timeframe.

In today's session, the broader market sentiment around ongoing trade conflicts and US-UK trade deals will direct the GBP/JPY's movements.

GBP/USD Tumbles Following Starmer-Trump Talks

GBP/USD edges lower, hovering around 1.2593, after President Trump announced that trade tariffs might be imposed on the UK unless vague terms of a trade deal with the US are agreed upon by an unspecified deadline following his meeting with UK Prime Minister Keir Starmer. Wednesday's comments from UK Chancellor of the Exchequer Rachel Reeves expressed confidence that trade and investment between the US and UK would remain stable despite the new US administration, stating, "The last time President Trump was in the White House, trade and investment flows between our two countries increased, and I've got every confidence that that can happen again." However, Bank of England (BoE) Monetary Policy Committee Member Swati Dhingra's indication for further monetary policy easing could add additional pressure on the sterling.

On the other hand, Trump's trade policies have boosted safe-haven currency inflows, reinforcing the US dollar. The US Gross Domestic Product (GDP) grew by 2.4% quarter-on-quarter, surpassing the anticipated 2.2%, while the annual rate held steady at 2.3%. Meanwhile, US Durable Goods Orders jumped 3.1% month-over-month in January, exceeding the forecast of 2.0% and showing a marked improvement from the prior figure of -1.8%. US initial jobless claims for the week ending February 21 came in significantly higher than anticipated. Individuals claiming unemployment benefits for the first time totalled 242,000, exceeding estimates of 221,000.

Additionally, a recent contraction in the Global US Services Purchasing Managers Index (PMI) along with dampened Consumer Confidence data for February has provoked bets for the Fed's dovish stance. Cleveland Fed President Beth Hammack indicated that she anticipates the US central bank's interest rate policy will remain unchanged. Meanwhile, Patrick Harker, President of the Philadelphia Federal Reserve Bank, also voiced his support for maintaining the interest rate within its current range.

Investors will closely observe today's US Personal Consumption Expenditures (PCE) Price Index for January and ongoing global trade tensions for further guidance on the GBP/USD exchange rate.

EUR/USD Rebounded Amid Renewed US-EU Trade Tensions

EUR/USD gains ground near 1.0399 due to the weakening euro amid a risk-off market mood. Retail sales in Germany rose by 0.2% month-on-month, recovering from the 1.6% decline in December and surpassing market expectations of no change. Year-on-year, retail sales increased by 2.9% in January, up from the 1.8% growth recorded in December. French consumer spending fell to 0.5% month-on-month in January, following a 0.7% rise recorded in December, slightly below the market expectation for a 0.6% decline. French preliminary CPI m/m remained unchanged at 0.0% month-on-month in February, following a 0.2% increase in January, falling short of the market expectation for a 0.5% rise. French preliminary GDP q/q grew by 0.2% quarter-on-quarter in the fourth quarter of 2024, following a 0.4% rise recorded in the third quarter, matching the market expectation of 0.2% growth. German Preliminary CPI m/m rose 0.4% month-on-month in February, following a 0.2% rise in January. This was in line with the market expectation of a 0.4% increase.

Aside from the domestic data, any developments in Trump's tariff agenda suggesting the imposition of "reciprocal" tariffs on the European Union (EU) as early as April could create market volatility in the shared currency. On Wednesday, Trump reiterated his plan to impose 25% tariffs on Canada and Mexico while also expressing intentions to include the EU among countries facing trade penalties on exports to the United States (US). The European Union pledged to respond "firmly and immediately" to these "unjustified" trade barriers, signalling its readiness to retaliate promptly against the proposed tariffs.

On the other hand, the greenback gained on renewed US-EU trade tensions and more substantial US GDP data. In the fourth quarter of 2024, the annual US GDP grew by 2.3%, meeting the initial estimate and market expectations. Furthermore, durable goods orders jumped by 3.1% in January, exceeding the 2% forecast and recovering from a 2.2% drop in December. Meanwhile, US initial jobless claims for the week ending February 21 have printed significantly higher than expected. First-time claimants of jobless benefits totalled 242K, surpassing estimates of 221K. Recent speeches by key FOMC members have signalled a potential dovish stance from the Fed.

Today's US PCE inflation data for January will provide insights into the Federal Reserve's (Fed) monetary policy outlook, significantly influencing market sentiment around the EUR/USD exchange rate.

AUD/USD Sinks Ahead of US PCE Inflation Data

The Australian Dollar (AUD) edged lower against the US dollar, approaching 0.6215, following US President Donald Trump's confirmation that his suggested 25% tariffs on goods from Mexico and Canada will be implemented on March 4. This is in addition to a 10% tax on Chinese imports due to persistent worries about drug trafficking into the US. President Trump introduced further tariffs on Chinese products, raising the previously established 10% tariffs from February 4, aimed at tackling the fentanyl opioid crisis, resulting in a total tariff rate of 20%. Any new US tariff threats could adversely affect the Australian dollar, as China is Australia's primary trading partner.

On the domestic data front, Australia's Private Capital Expenditure data, released on Thursday, unexpectedly contracted by 0.2% quarter-on-quarter in Q4 2024, missing market expectations of 0.8% growth, following a revised 1.6% expansion in the previous quarter. On Thursday, Andrew Hauser, Deputy Governor of the Reserve Bank of Australia, expressed optimistic developments regarding inflation but underscored the necessity for tangible progress. He also emphasised that Australia's tight labour market remains a significant challenge in managing inflation.

On the other hand, Trump's tariff agenda is expected to boost inflationary pressure, fuelling the market anticipation for a restrictive monetary policy stance from the Federal Reserve (Fed). In Q4 2024, the US GDP grew by 2.3%, matching expectations. Durable goods orders rose 3.1% in January, surpassing the 2% forecast and recovering from a 2.2% drop in December. However, initial jobless claims for the week ending February 21 were higher than expected, with 242K first-time claimants, exceeding the 221K estimate. Investors will closely monitor the Personal Consumption Expenditures Price Index (PCE) data, along with any significant developments in US-China trade tariffs, for guidance on the AUD/USD exchange rate.

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

Important: This blog is for informational purposes only and should not be considered financial advice. Currency Solutions does not consider individual investment goals, financial circumstances, or specific requirements of readers. We do not endorse or recommend any particular financial strategies or products discussed. Currency Solutions provides this content as is, without any guarantees of completeness, accuracy, or timeliness.