• AUD/USD softens to around 0.6260 in Thursday’s early European session, down 0.44% on the day. 
• The RBA is expected to deliver a rate cut to 4.1%
• The US January labor market report on Friday will be closely watched. 

The AUD/USD pair weakens to near 0.6260 on Thursday during the European trading hours, pressured by rising fears over US-China trade war tensions and lower-than-expected Australian Trade Balance data. On Friday, all eyes will be on the US January labor market report, including the Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings.

Data released by the Australian Bureau of Statistics on Thursday showed that Australia’s trade surplus decreased to 5,085M MoM in December from 6,792M (revised from 7,079) in November. This reading came in lower than the 7,000M expected. Meanwhile, Exports rose by 1.1% MoM in December versus 4.2% (revised from 4.8%) prior.  Imports climbed by 5.9% MoM in December, compared to 1.4% (revised from 1.7%) recorded in November.

Furthermore, the rising expectation that the Reserve Bank of Australia (RBA) will cut its interest rates for the first time since November 2020 contributes to the AUD’s downside. Money markets are now pricing in nearly a 95% chance of a rate cut from the current 4.35% to 4.10%.

Additionally, US President Donald Trump opens the door to significantly higher tariffs on other trade partners, such as the Eurozone and China. This, in turn, exerts some selling pressure on the China-proxy Australian Dollar (AUD) as China is a major trading partner to Australia.

The strength of the US Dollar is likely to persist over the coming quarters due to the hawkish stance of the US Federal Reserve (Fed). However, the US economic data released on Friday will be the highlight. Any signs of weaker labor marker conditions could drag the USD lower and help limit the pair’s losses.

• EUR/GBP moves higher to near 0.8333 ahead of the BoE’s monetary policy decision at 12:00 GMT.
• The BoE is expected to reduce interest rates by 25 bps to 4.5%.
• ECB Centano sees interest rates falling below the neutral rate.

The EUR/GBP pair rises to near 0.8333 in Thursday’s European session. The cross gains as the Pound Sterling (GBP) weakens across the board ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT.

Traders have fully priced in a 25-basis points (bps) interest rate reduction that will push borrowing rates lower to 4.5%, with an 8-1 vote split. Therefore, the next move in the British currency will be influenced by the monetary policy guidance from BoE Governor Andrew Bailey at the press conference after the interest rate decision.

Andrew Bailey is unlikely to deliver dovish guidance as analysts at Citi expect an uptick in inflation ahead due to expectations of a reversal in energy prices and strong wage growth.

Meanwhile, investors have underpinned the Euro (EUR) against the Pound Sterling but is underperforming its major peers too as European Central Bank (ECB) policymaker and Governor of Bank of Portugal Mario Centano has guided a dovish interest rate outlook. Centano expects the Deposit Facility rate could go below the neutral rate as the economic needs stimulus to hold inflation at 2% target.

On the economic front, Eurozone Retail Sales data for December has come in weaker than expected. Month-on-month Retail Sales declined at a faster pace of 0.2% than estimates of 0.1%. In November, Retail Sales remained flat.

EUR/GBP bounces back after retracing a little over 61.8% from the January 20 high of 0.8474 to near 0.8290. The outlook of the cross is still bearish as it stays below the 50-day Exponential Moving Average (EMA), which trades around 0.8350.

The 14-day Relative Strength Index (RSI) rebounds from 40.00, which suggests a sideways trend ahead until it stays in the 40.00-60.00 range.

A fresh upside move in the pair would appear if it breaks the February 3 high of 0.8361. This scenario would drive the cross towards 38.2% Fibonacci retracement at 0.8380, followed by the round-level resistance of 0.8400.

On the flip side, a downside move by the pair below the February 3 low of 0.8290 will expose it towards the January 2 low of 0.8267 and the December 19 low of 0.8222.

EUR/GBP daily chart

USD is negative but might not reach 151.80

24-HOUR VIEW: “We noted in early Asian trade yesterday that USD ‘is under mild downward pressure and could edge lower.’ However, we were of the view that ‘any decline is unlikely to break below 153.70.’ We did not expect the steep selloff that sent USD plunging by 1.12% (152.60). Despite the deeply oversold conditions, the weakness has not stabilised. Today, USD could drop further, but given the oversold conditions, it might not be able to break the significant support at 151.80. Note that yesterday’s low of 152.10 is expected to provide support as well. On the upside, any recovery is likely to remain below 153.50 (minor resistance is at 153.00).”

1-3 WEEKS VIEW: “Two days ago (04 Feb, spot at 155.20), we indicated, USD ‘is likely to trade in a 153.70/156.70 range for the time being.’ Yesterday, we highlighted that ‘looking ahead, if USD were to break and remain below 153.70, it could trigger a sustained drop.’ However, we did not expect the sudden sharp plunge that reached a low of 152.10. While we are revising our outlook for USD to negative, note that there is a significant support level at 151.80. We will maintain our view provided that USD remains below 154.30.”

• EUR/USD slumps to near 1.0360 as the US Dollar rebounds, with investors turning cautious ahead of Friday’s US NFP data release for January.
• Chicago Fed President Goolsbee said it is difficult to predict whether inflation will accelerate from overheating or due to US President Trump’s tariffs.
• ECB policymaker Centeno anticipates that interest rates could go below the neutral rate.

EUR/USD corrects to near 1.0360 in Thursday’s European session. The major currency pair drops as the US Dollar (USD) gains ground after a sharp downside move in the last three trading days. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 108.00 from the weekly low of 107.30.

The recovery in the US Dollar appears to be the result of investors’ caution ahead of the January nonfarm Payrolls (NFP) data, which will be released on Friday. The upbeat ADP Employment Change data for January has set a positive tone for the official employment data. ADP reported on Wednesday that the private sector added 183K workers last month, significantly higher than estimates of 150K and the prior release of 176 K.

Investors will pay close attention to Friday’s US employment data as it will influence market speculation for how long the Federal Reserve (Fed) will keep interest rates steady in the current range of 4.25%-4.50%. Last week, Fed Chair Jerome Powell said that the central bank would make monetary policy adjustments only after seeing “real progress in inflation or at least some weakness in the labor market”.

Meanwhile, Fed officials are uncertain about the monetary policy outlook as they struggle to predict the impact of US President Donald Trump’s economic agenda. On Wednesday, Chicago Fed Bank President Austan Goolsbee said, “If we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs.”

Daily digest market movers: EUR/USD weakens as ECB Centeno delivers dovish policy guidance

• The recovery move in the EUR/USD pair is also driven by some weakness in the Euro (EUR) amid firm expectations that the European Central Bank (ECB) will continue gradually reducing interest rates. Last week, the ECB cut its Deposit Facility rate by 25 basis points (bps) to 2.75%, and officials see more coming this year.
• On Wednesday, ECB policymaker and Governor of the Bank of Portugal Mario Centeno said in an interview with Reuters that it was pretty clear that we have to keep the “trajectory of interest rates going down”. Centeno didn’t provide a specific policy-easing path but highlighted that we need to go to a neutral rate “sooner rather than later”. Centeno cautioned that the ECB could go “below the neutral rate” as the Eurozone economy is not “strong enough to support inflation at 2%”.
• When asked about the impact of a global trade war on the Eurozone due to US President Donald Trump’s tariff agenda, Mario Centeno said that a 10% levy on China would have some deflationary effect in the trading bloc. He added that Trump’s tariffs on Europe can be “quite impactful,” but scrutinization of the impact of global tariffs would be predictable after March.
• Market participants anticipate that US President Trump will turn to the Eurozone after dealing with China. Over the weekend, Trump said that tariffs will definitely happen with the European Union and “I can tell you that because they’ve really taken advantage of us”.
• On the economic front, Eurozone Retail Sales data for December has come in weaker than expected. Month-on-month Retail Sales declined at a faster pace of 0.2% than estimates of 0.1%. In November, Retail Sales remained flat.

Technical Analysis: EUR/USD fails to hold above 1.0400

Next resistance at 0.5725 is unlikely to come under threat

24-HOUR VIEW“Although we noted ‘a slight increase in upward momentum’ yesterday, we were of the view that NZD ‘is likely to trade in a higher range of 0.5605/0.5680.’ Instead of trading in a range, NZD rose, reaching a high of 0.5703. Upward momentum has increased further, albeit not much. Today, NZD could edge above 0.5705 before levelling off. The next resistance at 0.5725 is unlikely to come under threat. Support is at 0.5665; a breach of 0.5645 would mean that the current mild upward momentum has eased.”

1-3 WEEKS VIEW: “We highlighted two days ago (04 Feb, spot at 0.5625) that ‘the current price movements appear to be part of a range trading phase, likely between 0.5510 and 0.5705.’ Yesterday, NZD rose to within a couple of pips of 0.5705 (high of 0.5703). There has been a tentative buildup in momentum. From here, NZD could rise gradually to 0.5725. Currently, it is too soon to determine if NZD can break clearly above this resistance level. The upward pressure will remain intact as long as NZD remains above the ‘strong support’ level, currently at 0.5615.”

GBP/USD to top out this quarter in the 1.25/26 area

“However, the external environment may sour if US Treasury yields rise again, which is the house view. And the brief reprieve in the tariff noise should allow investors to refocus on the UK’s fiscal and monetary mix. Fiscal will be a story for March, but today the monetary angle reappears with the Bank of England meeting.”

“We expect an 8-1 vote to cut rates and a downward revision to growth forecasts to be a mild sterling negative. Much more negative would be a 9-0 vote, should arch-hawk Catherine Mann vote for a rate cut. We continue to favour GBP/USD topping out this quarter in the 1.25/26 area and see a strong case for it to be trading close to 1.19/20 later this year.”