Forex markets brace for volatility as euro and pound edge higher, yen weakens and gold pushes toward new records

Today, investors’ attention is focused on the release of services sector activity data from S&P Global and Hamburg Commercial Bank (HCOB). According to forecasts, indicators in Germany and across the euro area as a whole are expected to remain at current levels, above the psychological 50 mark that separates expansion from stagnation. Inflation data may prove more market-moving, as it could influence future monetary policy decisions. Analysts expect the core harmonised consumer price index, excluding fresh food and energy prices, to remain at 2.3% year-on-year in January, slightly above the 2.0% target, while the broader indicator is forecast to slow from 1.9% to 1.7%. Producer inflation is likely to adjust to –2.3% year-on-year and –0.3% month-on-month. Analysts anticipate that tomorrow’s European Central Bank (ECB) meeting will leave policy parameters unchanged, although the regulator may strengthen its verbal guidance, partly in response to the stronger euro, which poses risks to the regional economy. Governing Council members Martin Kocher and François Villeroy de Galhau have previously warned that further euro appreciation could prompt the ECB to resume rate cuts, as the current exchange rate increases disinflationary pressure and slows economic recovery. For export-oriented economies, particularly Germany, where exports account for nearly half of gross domestic product (GDP), a strong currency reduces price competitiveness on global markets. Tomorrow, US investors will focus on key US business activity data. These figures are viewed as one of the most important indicators of economic conditions, as the services sector accounts for a large share of US GDP and directly reflects current business activity. The S&P Global index is expected to come in around 52.5 points in January, while the Institute for Supply Management (ISM) index is forecast to decline from 54.4 to 53.5 points.

GBP/USD

During the morning session, the pound is gaining ground, testing the 1.3700 level for an upside breakout, as investors remain cautious ahead of the Bank of England’s monetary policy decision, due tomorrow at 14:00 (GMT+2). Analysts are confident that the regulator will keep monetary policy parameters unchanged, maintaining the interest rate at around 3.75% following a 25-basis-point cut in December, amid persistent inflation that continues to constrain economic growth. According to data from the British Retail Consortium (BRC), shop price inflation accelerated in the first half of January from 0.7% to 1.5% year-on-year, exceeding the three-month average of 0.9%. Non-food inflation rose from –0.6% to 0.3% versus –0.3% previously, while food inflation increased from 3.3% to 3.9% compared with 3.4%.

At the same time, the labour market appears less stable: the unemployment rate has reached a five-year high near 5.1%, and the negative trend may continue, with entry-level positions proving the most vulnerable due to higher exposure to automation and the upcoming minimum wage indexation. In the private sector, wage growth has slowed from 6.0% in early 2025 to 3.6% and is likely to continue easing toward 3.0%, in line with pre-pandemic averages, when the labour market was recovering but interest rates were significantly lower. The combination of weak economic growth at the end of 2025 and persistent inflationary pressure presents the Bank of England with a difficult balancing act between containing price pressures and supporting macroeconomic activity.

As a result, most policymakers are likely to keep current monetary settings unchanged, while doves Alan Taylor and Swati Dhingra are expected to openly advocate for rate cuts. At the same time, it is worth noting that the International Monetary Fund (IMF) forecasts that the UK economy could rank third among G7 countries in terms of growth in 2026, behind only the US and Canada, partly thanks to investments in artificial intelligence technologies. Tomorrow, traders will again focus on key US business activity data, as the services sector represents a significant share of GDP and directly reflects business conditions. The S&P Global index is expected near 52.5 points for January, while the ISM index is forecast to ease from 54.4 to 53.5 points.

AUD/USD

The Australian dollar is showing moderate gains against the US dollar during the Asian session, consolidating around 0.7030 and near record highs set last week, despite weak manufacturing activity data from Australia’s AiG Group. In December, the index declined further from –18.3 to –19.4 points, missing average market expectations, while the overall industrial activity index edged up slightly from –12.5 to –12.3 points but remains deep in negative territory. At the same time, the S&P Global composite index for January showed a modest increase from 55.5 to 55.7 points, while a similar indicator from China accelerated from 52.0 to 52.3 points, outperforming expectations of a decline to 51.8. Ongoing support for the Australian dollar comes from the Reserve Bank of Australia’s (RBA) decision on 3 February to raise the interest rate by 25 basis points to 3.85% for the first time since November 2023. In its statement, the regulator noted that while inflation has eased from its 2022 peaks, it accelerated significantly in the second half of last year due to strong domestic demand. Economic activity was supported by consumer spending, investment and housing market dynamics, while labour market conditions remain tight. The RBA also revised its official forecasts upward, expecting inflation to peak around 4.2% in the second half of the year. Markets do not rule out further monetary tightening, with current pricing implying an 80.0% probability that policymakers will return to a hawkish stance at the May meeting. Meanwhile, the US dollar remains vulnerable ahead of the final January US labour market report due later this week. Today at 15:15 (GMT+2), traders will focus on the January ADP non-farm employment data, based on a survey of around 400,000 businesses. Forecasts suggest an increase from 41.0 thousand to 48.0 thousand, which would be a positive signal ahead of the US Department of Labor’s final report.

USD/JPY

The US dollar is showing moderate gains against the Japanese yen, extending a pronounced short-term bullish trend and updating local highs since 23 January. Prices are currently testing the 156.30 level for an upside breakout, as market participants gradually prepare for the US labour market report later this week, although its release may be delayed due to the partial government shutdown that has not yet been resolved. The House of Representatives recently voted to resume government funding, but the bill excluded a sixth package related to full funding for the Department of Homeland Security. Additional support for the dollar comes from President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair, which markets perceived as a signal in favour of maintaining relatively tight monetary policy, temporarily boosting confidence in the currency. At the same time, the fundamental backdrop remains mixed: producer price data for December showed growth, reflecting persistent inflationary pressure, while at the January meeting borrowing costs were held in the 3.50–3.75% range, and divisions persist within the Federal Open Market Committee (FOMC) over the timing of the next policy easing. In Japan, the situation is more complex: on the one hand, authorities remain confident that inflation will stabilise near the 2.0% target and signal readiness for potential tightening, but on the other hand, January Tokyo inflation data showed a slowdown to 1.5%, while weak retail sales figures confirmed the fragility of domestic demand, limiting scope for a hawkish stance. Uncertainty is further heightened by snap parliamentary elections scheduled for 8 February, as Prime Minister Sanae Takaichi has announced a temporary abolition of the food tax, raising investor concerns over fiscal sustainability in a country with one of the world’s highest public debt levels.

XAU/USD

Gold prices are showing moderate gains during the morning session on 4 February, continuing to build on a strong bullish impulse and once again testing the $5,080 per troy ounce level for an upside breakout. Quotes are attempting to set fresh record highs, although concerns are growing over excessive strengthening of the safe-haven asset, which periodically triggers sharp corrections. The unprecedented rally in 2025 was driven by a unique combination of factors: aggressive gold purchases by central banks seeking to diversify reserves created strong structural demand, while a synchronised interest rate adjustment cycle among leading global regulators, including the Federal Reserve, reduced the opportunity cost of holding a non-yielding asset, weighing on the US dollar. Additional support for the metal has come from persistent geopolitical risks, which have increased investor demand for traditional safe-haven assets. However, market participants are most concerned about a potential slowdown in gold purchases by the People’s Bank of China amid record-high prices, which could deprive the market of a key source of support.