GBP/JPY sinks following BoJ rate hike

The Japanese yen (JPY) strengthened against sterling, trading near 192.33, following the Bank of Japan's (BoJ) interest rate decision. As expected, the BoJ raised its short-term interest rate target by 25 bps at its January meeting on Friday, increasing the range from 0.15%-0.25% to 0.40%-0.50%. Friday’s National Consumer Price Index (CPI) figures printed at 3.6% YoY, up from 2.9%, matching market expectations. The National CPI excluding fresh food rose 3.0% YoY in December, in line with expectations, while CPI excluding fresh food and energy increased by 2.4% YoY, unchanged from the previous revision of 2.7%.

Japan’s Trade Balance data showed a ￥130.9 billion surplus in December, driven by resilient exports (up 2.8% YoY) despite slower growth. Imports rose 1.8% YoY, missing the forecasted 2.6%, indicating weak domestic demand.

Sterling remains undermined by higher-than-expected UK Public Sector Net Borrowing numbers, softer-than-expected UK inflation and retail sales data, and moderate GDP growth. Investors will closely monitor PMI figures to gauge the impact of the stringent fiscal policies implemented by Chancellor of the Exchequer Rachel Reeves in the autumn budget. In today’s session, market sentiment surrounding the S&P Global/CIPS Purchasing Managers Index (PMI) data and BoJ’s policy decision will guide GBP/JPY movements.

AUD/USD buoyed ahead of US PMI

AUD/USD strengthened to 0.6323 as President Trump's remarks, "would rather not have to use tariffs on China," restored optimism about potential progress in US-China trade negotiations, lending support to the China-proxy Aussie. Judo Bank’s Composite Purchasing Managers Index (PMI) rose to 50.3 in January, reflecting four months of modest private sector growth, up from 50.2 in December. The Manufacturing PMI increased to 49.8 from 47.8, marking the highest in a year and ending a 13-month contraction. However, the Services PMI fell to 50.4 from 50.8, a six-month low, indicating slower growth in the sector. Additionally, the People's Bank of China (PBOC) maintained Loan Prime Rates (LPRs) at 2.00%, and market speculation about potential rate reductions from the Reserve Bank of Australia (RBA) further supported AUD.

On Thursday, President Trump proposed an urgent need for global interest rate cuts, sparking risk-on sentiment for the dollar. Speculation that Trump’s policies could stoke inflationary pressures, limiting the Federal Reserve to just one more rate cut, bolstered the greenback. In today’s session, the US S&P Global Manufacturing and Service PMI for January, along with US Existing Home Sales and Michigan Consumer Sentiment Index data, will influence the AUD/USD exchange rate.

USD/CAD slides as Trump calls for Fed rate cuts

USD/CAD traded near 1.4317 as improved crude oil prices supported the commodity-linked Canadian Dollar (CAD). However, crude oil prices have declined weekly since President Donald Trump unveiled a comprehensive plan to increase US production and called on OPEC to reduce crude prices. Rising expectations suggest the Bank of Canada will continue rate cuts in 2025 to boost growth and manage growing inflation risks. Meanwhile, Trump’s proposed 25% tariffs on Canada and Mexico could negatively impact the Canadian economy, limiting CAD's upside. Canada’s retail sales were flat in November, missing the expected 0.2% growth, and down from the prior 0.6% increase.

On the other hand, Trump’s comments at the World Economic Forum, stating, "With oil prices going down, I’ll demand that interest rates drop immediately, and likewise they should be dropping all over the world," immediately weighed on the US dollar. Trump’s remarks sparked market expectations of steady interest rates by the Fed. US flash S&P PMI for January, the Michigan Consumer Sentiment Index, and oil price movements will provide fresh guidance for USD/CAD’s trajectory.

EUR/GBP jumps on Eurozone’s PMI data

The euro strengthened against sterling, trading near 0.8445, on improved risk sentiment following recent comments from US President Donald Trump. The Eurozone Manufacturing PMI rose to 46.1 in January, exceeding expectations of 45.3. However, the Services PMI dipped to 51.4 from 51.6 in December, missing the 51.6 consensus. The Eurozone Composite PMI improved to 50.2, up from 49.6 in December, marking a five-month high. In Germany, the Manufacturing PMI unexpectedly climbed to 44.1 from 42.5, its highest in eight months, while the Services PMI rose to 52.5 from 51.2, hitting a six-month peak. The German Composite Output Index also increased to 50.1, its highest in seven months. However, continued European Central Bank (ECB) rate cut bets and fragile Eurozone consumer confidence could dampen the euro.

The pound rallied on stronger-than-expected PMI figures. The seasonally adjusted S&P Global/CIPS UK Manufacturing PMI rose to 48.2 in January, up from 47 in December, surpassing expectations of 47.1. The Preliminary UK Services Business Activity Index also increased to 51.2, slightly up from 51.1 in December, and exceeded the forecasted 50.6. The broader market sentiment following the PMI numbers will drive the EUR/GBP 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.