The pair is supported by improving business activity data in the eurozone, although the overall fundamental backdrop remains unfavorable amid record-high public debt levels and persistent geopolitical risks.
Preliminary business activity data from S&P Global and Hamburg Commercial Bank (HCOB) for January pointed to signs of stabilization in the eurozone economy: the composite PMI held at 51.5 points, remaining above the key 50.0 threshold that signals expansion in the private sector. The most positive developments were seen in manufacturing, where the index rose to 49.4 from 48.8 a month earlier, while the services PMI slipped from 52.4 to 51.9, its lowest level in four months.
The main negative factor for the single currency remains the rapid growth of public debt. By the end of Q3 2025, debt levels in three EU countries — France, Poland, and Romania — reached record highs: France’s debt rose to 117.7% of GDP, Poland’s to 58.1%, and Romania’s to 58.9%. Germany’s debt also increased significantly, reaching 63.0% of GDP, the highest level since Q3 2023.
These figures reinforce concerns about the long-term sustainability of European public finances, particularly amid high energy costs and declining global competitiveness. The geopolitical backdrop improved slightly after US President Donald Trump announced the cancellation of planned tariffs on eight EU countries that were due to take effect on February 1. The decision followed talks with NATO Secretary General Mark Rutte in Davos, where the parties agreed on a “framework for a future Greenland deal.” Trump ruled out the use of force to establish control over the island, temporarily easing transatlantic tensions. However, structural disagreements between Washington and Brussels persist, continuing to limit the euro’s upside potential. Investors are focused on Germany’s IFO business climate data: in January, the index stood at 87.6 points, below forecasts of a modest rise to 88.1.
GBP/USD
The pound is trading within a narrow range against the US dollar, fluctuating near 1.3660 and the local highs of September 18. The pair is showing cautious dynamics following the release of retail sales data, which, however, failed to outweigh concerns over the Bank of England’s monetary policy outlook amid global macroeconomic risks. Nevertheless, December retail sales exceeded expectations: monthly volumes rose by 0.4%, offsetting a 0.1% decline in November, while annual growth accelerated to 2.5%, the fastest pace since April, driven by non-store retailers and online sales, which increased by 1.8% month-on-month.
These figures point to resilient consumer demand at the end of last year, which could support economic growth in the first quarter. Additional support for the pound came from business activity data, with the manufacturing PMI rising from 50.6 to 51.6 in January, the services PMI jumping from 51.4 to 54.3, and the composite index increasing from 51.4 to 53.9.
Market participants remain focused on the outlook for the Bank of England’s monetary policy. Despite strong retail sales, the regulator is likely to maintain a cautious stance amid global uncertainty and persistent inflation risks. In December 2025, policymakers narrowly voted (5–4) to cut interest rates by 25 basis points to 3.75%, the fourth reduction of the year and the lowest level since 2022, reflecting growing concerns about economic strain, including two consecutive months of GDP contraction and slowing inflation to 3.2% in November.
Despite the easing step, deep divisions remain within the Monetary Policy Committee: “doves,” supported by Governor Andrew Bailey, favor further rate cuts to support growth, while “hawks,” including Deputy Governor Clare Lombardelli, warn that inflation could remain above the 2.0% target and call for greater caution.
Officials continue to stress that future decisions will be data-dependent. The next policy meeting is scheduled for February 5. Additional pressure on the pound comes from concerns about slowing eurozone growth — the UK’s key trading partner. While Trump’s decision to cancel additional tariffs reduced immediate trade risks, long-term relations between London and Washington remain complex and dependent on future negotiations, including issues surrounding Greenland.
AUD/USD
The Australian dollar is strengthening against the US dollar following a notable opening gap that allowed the pair to hold above the psychological 0.6900 level. Strong support comes from positive macroeconomic data pointing to economic resilience and increasing the likelihood of tighter monetary policy by the Reserve Bank of Australia (RBA). The labor market showed significant improvement in December: the unemployment rate fell to 4.1% from 4.3%, beating expectations of 4.4% and marking the lowest level since May, while total employment rose by 65.2K, well above forecasts of 30.0K, offsetting a revised decline of 28.7K the previous month. Both full-time (+54.8K) and part-time (+10.4K) employment increased.
These figures indicate continued tightness in the labor market, creating upward inflation risks and reinforcing the hawkish stance of some RBA officials. Business activity also accelerated sharply at the start of 2026: the composite PMI climbed to 55.5 in January from 51.0 in December, the highest since April 2022, while services rose to 56.0 and manufacturing to 52.4, signaling broad-based economic recovery.
The external backdrop is also supportive. Easing geopolitical tensions around Greenland and the removal of additional US tariffs have reduced risks to global trade, benefiting Australia’s export-oriented economy. However, investors remain wary of renewed tensions between the US and China, particularly given references to a hypothetical Chinese threat in the Arctic region.
China continues to ignore US sanctions on energy supplies from Russia and Iran. Meanwhile, Trump is increasing pressure on Canada to abandon a trade deal with China, fearing that Canada could become a transit hub for Chinese goods entering the US. Investors will focus on Australia’s January inflation data on Wednesday at 02:30 (GMT+2), which could shape expectations for the RBA’s next steps. Forecasts suggest annual inflation may slow from 3.4%, while the monthly figure could accelerate due to higher fuel and food prices.
USD/JPY
The US dollar is losing ground against the Japanese yen, testing the 154.00 level to the downside. The sharp strengthening of the yen late last week followed the Bank of Japan’s first policy meeting of 2026. As expected, the central bank kept interest rates unchanged at 0.75%. However, Governor Kazuo Ueda offered no clear signals of imminent tightening, initially pressuring the yen. He stressed that more time is needed to assess the effects of previous rate hikes and reiterated that policy decisions would remain data-driven, while noting that yen weakness could temporarily fuel inflation. Despite the cautious tone, the BOJ upgraded its GDP growth forecast for FY2025 from 0.7% to 0.9%.
The main driver of the pair’s reversal was growing concern about potential intervention by Japan’s Ministry of Finance and the BOJ. Levels near 159.00 per dollar were viewed as a “red line” that could trigger official action. Analysts noted heightened market sensitivity, with warnings that sharp fluctuations near these levels increase the likelihood of intervention. As a result, the yen received strong short-term support from technical and psychological factors.
Meanwhile, US data was mixed: manufacturing PMI fell slightly short of expectations at 51.9, while services PMI stood at 52.5. Inflation expectations from the University of Michigan declined, reducing the Fed’s justification for maintaining restrictive policy.
XAU/USD
Gold continues to hit record highs, consolidating above the psychological 5000.00 level. The precious metal is supported by persistent geopolitical risks, concerns over the independence of the US Federal Reserve, and strong demand for safe-haven assets. Investors are closely monitoring developments around Greenland, as well as escalating tensions in Venezuela and Iran. Although Trump ruled out military action and canceled additional tariffs, the broader uncertainty surrounding potential territorial revisions continues to fuel demand for gold.
Another key factor is uncertainty around the future leadership of the Federal Reserve, as Jerome Powell’s term expires in May 2026. Political pressure on the central bank raises concerns over its independence, encouraging investors to shift toward assets less exposed to policy risks. Despite strong US economic data that would normally weigh on gold, geopolitical and institutional uncertainty remain the dominant drivers.
Markets now expect at least two 25-basis-point rate cuts, while the Fed currently signals only one cut in the second half of 2026. Today at 15:30 (GMT+2), investors will focus on US durable goods orders for November, while Wednesday’s Fed meeting will be closely watched for policy guidance.
