Euro Zone Industry Shrinks Faster Than Feared in Dec

EUR/GBP softens to near 0.8325 in Friday’s early European session. 

UK economy grew by 0.1% QoQ in Q4, beating expectations after recording zero growth in the previous reading. 

Investors await the preliminary reading of the Eurozone Q4 GDP report, which is due later on Friday. 

The EUR/GBP cross trades in negative territory for the second consecutive day around 0.8325 during the early European session on Friday. The upbeat UK Gross Domestic Product (GDP) data for the fourth quarter (Q4) provides some support to the Pound Sterling (GBP). 

The UK GDP expanded by 0.1% between October and December, surpassing forecasts of a 0.1% decline, the Office for National Statistics (ONS) showed on Thursday. In December alone, GDP rose by 0.4% MoM, compared to 0.1% expansion in November. 

BoE officials have been guiding a cautious approach to interest rate cuts as they are concerned about the persistence of inflationary pressure.  BoE Chief Economist Huw Pill said on Thursday that he “urges caution on interest rate cuts” because the long process of wrestling down inflation is not yet complete. 

On the Euro front, the potential trade war between Europe and the US could drag the shared currency lower. US President Donald Trump unveiled a roadmap on Thursday for charging reciprocal tariffs against every country that imposes duties on US imports. Nonetheless, commerce and economics officials need to study reciprocal tariffs against countries that place tariffs on US goods, and it will not be due until April 1.

Later on Friday, the preliminary reading of the Eurozone GDP for Q4 will be published. The Eurozone economy is estimated to grow 0.9% YoY in Q4. In case of a stronger-than-expected outcome, this could lift the Euro (EUR) against the GBP in the near term. 

Source: FXSTREET

The US Dollar Index depreciated following Trump's decision to delay the implementation of reciprocal tariffs.

US Retail Sales are forecasted to contract by 0.1% MoM in January, following a previous increase of 0.4%.

The Greenback may gain ground as US Core PPI inflation has increased the odds of the Fed delaying rate cuts.

The US Dollar Index (DXY), which tracks the US Dollar's (USD) performance against six major currencies, remains stable after losses in the previous session. At the time of writing, the DXY hovers around 107.00, while yields on 2-year and 10-year US Treasury bonds stand at 4.31% and 4.53%, respectively.

The US Dollar faces pressure following President Donald Trump's decision to delay the implementation of reciprocal tariffs. Additionally, declining US Treasury yields weigh on the Greenback, despite ongoing concerns about a global trade war.

Investor attention now shifts to the upcoming US Retail Sales report, the last key economic release of the week. Markets anticipate a slight monthly decline of 0.1% in January, following a 0.4% increase in the previous period.

Core PPI inflation in the United States (US) rose to 3.6% YoY in January, exceeding the expected 3.3% but slightly below the revised 3.7% (previously reported as 3.5%). This has reinforced expectations that the Federal Reserve (Fed) will delay rate cuts until the second half of the year. Additionally, persistently strong inflation could further support the outlook for the Fed to keep interest rates at 4.25%-4.50% for an extended period.

In his semi-annual address to Congress, Fed Chair Jerome Powell stated that policymakers “do not need to be in a hurry” to cut interest rates, citing a strong labor market and robust economic growth. He also warned that President Trump’s tariff policies could drive prices higher, complicating the Fed’s ability to lower rates.

A Reuters poll of economists now suggests the Fed will delay interest rate cuts until the next quarter due to rising inflation concerns. Many analysts who had previously anticipated a March rate cut have revised their forecasts, with the majority of respondents (surveyed between February 4-10) now expecting at least one rate cut by June, though opinions on the exact timing remain divided.

Source: FXSTREET

The US Dollar holds steady in the European morning on Friday after suffering large losses against its major rivals on Thursday. Eurostat will publish preliminary Employment Change and Gross Domestic Product (GDP) data for the fourth quarter. Later in the session, the US economic calendar will feature Retail Sales and Industrial Production data for January.

US Dollar PRICE This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the British Pound.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

In the early American session on Thursday, US President Donald Trump hinted that they could announce reciprocal tariffs later in the day. With the immediate reaction, the USD gathered strength against its peers. Later in the day, however, the market mood improved and the USD came under renewed selling pressure as investors breathed a sigh of relief. Trump refrained from imposing fresh tariffs and explained that he signed a memo ordering his economics team to devise a plan for reciprocal tariffs on every country that charges duties on US imports. Major equity indexes in the US ended the day decisively higher, and the USD Index lost more than 0.8% on the day.

EUR/USD gathered bullish momentum in the second half of the day on Thursday and climbed to a fresh two-week high near 1.0470. The pair stages a technical correction early Friday but manages to hold above 1.0450.

GBP/USD benefited from the improving risk mood and rose to its highest level in over a month, above 1.2570. The pair stays relatively quiet in the European morning on Friday and trades in a tight range, slightly above 1.2550.

Following a three-day rally, USD/JPY reversed its direction on Thursday and lost more than 1% on the day. The pair continues to edge lower to begin the European session and trades near 152.50.

Gold extended its uptrend and rose more than 0.8% on Thursday, as the benchmark 10-year US Treasury bond yield declined sharply following the latest headlines surrounding Trump's tariff policy. In the European morning on Friday, XAU/USD trades marginally higher on the day, above $2,930.

Source: FXSTREET