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UK manufacturing sector remained in contraction at the start of 2025, with January’s final PMI rising slightly to 48.3 from December’s 11-month low of 47.0. Despite the modest improvement, four of the five key components—output, new orders, employment, and stocks of purchases—declined. The only positive indicator was longer average vendor lead times, which typically reflect supply chain constraints rather than stronger demand.

Rob Dobson, Director at S&P Global Market Intelligence noted that Weak domestic and international demand remains a key drag on the sector, with no clear signs of recovery in sight. Rising cost pressures are also adding to the strain, with input price inflation reaching a two-year high.

The effects of last year’s Budget changes, particularly increases in the minimum wage and employer National Insurance contributions, are expected to feed further into rising costs. These factors could keep pressure on profit margins and limit any near-term rebound in manufacturing activity. Business confidence remains low, hovering near December’s two-year low, reflecting ongoing uncertainty in both economic conditions and policy direction.

Full UK PMI manufacturing final release here.

Eurozone PMI Manufacturing was finalized at 46.6, up from December’s 45.1, marking an eight-month high. While still in contraction, the data suggests a slowdown in the sector’s decline. Germany’s PMI rose to 45.0, while France rose to 45.0. Austria (45.7) and Italy (46.3) also saw multi-month highs. Greece (52.8) and Spain (50.9) remained in expansion.

According to Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, despite the improvement, manufacturing remains under pressure. It is "too early" to signal a full recovery. Rising input costs, driven by nearly 7% increase in oil prices, pose risks for firms already facing weak demand. ECB’s easing path could also be complicated if inflationary pressures persist.

The US is expected to impose tariffs on European exports. However, business confidence has improved, with future output expectations rising four points above the long-term average, partly driven by optimism surrounding upcoming elections in Germany and possibly France.

While Germany and France remain the weakest performers, the pace of contraction has slowed across multiple sectors. De la Rubia noted that over 90% of Eurozone exports go to markets outside the US, limiting the immediate impact of potential tariffs.

Full Eurozone PMI manufacturing final release here.

The Australian dollar is coming off a nasty week, declining 1.6%, and the slide has continued on Monday. AUD/USD fell as In the European session, AUD/USD is trading at 0.6146, down 1% on the day. Earlier, the Australian dollar fell as low as 0.6082, its lowest level since April 2020.

Trump tariffs, China PMI send Aussie reeling

It has been a dismal start to the trading week for the Australian dollar. There are two factors behind the Aussie’s latest troubles. First, US President Trumph has imposed 25% tariffs on Mexico and Canada, effective Tuesday. Mexico and Canada have both announced retaliatory tariffs in response, in what could quickly spiral into a full-blown trade war in the world’s largest trade zone.

Trump has also said he will go ahead on Tuesday with 10% tariffs against China, the world’s second largest economy. Global markets have been hit by fears of a global trade war resulting from the US tariffs and the Australian dollar, a risk curency, has been hit hard.

The Australian dollar has also reacted negatively to weak data out of China. The Caxain Manufacturing PMI slowed in January to 50.1, down from 50.5 in December and shy of the market estimate of 50.5. The reading was barely above the 50 level that separates expansion from contraction and indicated stagnation in factory activity.

Domestic demand improved in January but this was offset by a decline in export orders, as manufacturers rushed to ship orders in December to avoid the US tariffs. China’s government has introduced stimulus measures to prop up the economy and there has been improvement, such as in domestic demand. However, the Trump tariffs and a possible all-out trade between China and the US will hurt growth in both countries. So far, China has refrained from announcing retaliatory tariffs but China is unlikely to continue pulling its punches once the US tariffs take effect.

AUD/USD Technical

• AUD/USD is testing support at 0.6131. Below, there is support at 0.6062
• There is resistance at 0.6171 and 0.6240

The dollar index opened with gap-higher on Monday (up 1.1%), lifted by threats of trade war after US President Donald Trump imposed tariffs on imports from Canada, Mexico and China.

Two top US trading partners, Canada and Mexico immediately announced the counter measures, while China will look for assistance from World Trade Organization.

Although the dollar eased from the session peak, near-term structure remains firm, as daily studies improved (14-momentum emerged from negative territory, RSI rose above neutral 50 zone and MA’s turned into full bullish setup.

Markets see strong potential for further dollar’s rise in the environment of growing uncertainty over the negative consequences of trade war that fuels risk aversion.

Res: 109.73; 110.00; 110.50; 111.06
Sup: 108.61; 108.40; 107.89; 107.59

Crude oil started the week with some volatility, driven by tariffs and trade war concerns. Despite the initial recovery, I see this as a temporary corrective reaction higher in Elliott wave terms, and that sooner or later weakness could resume. The most important is a five-wave impulsive decline from above $79, that suggests that the trend may have shifted, signaling further downside after an intraday wave B rally.

The first resistance is already around 75.16, but with the sharp price movement into this area, I think there’s room for slightly higher prices within the a-b-c structure. Still, I expect bears to be back this week, as long as the market remains below the 79.36 invalidation level.

US30, Daily

US30 bounced from the crucial 45000 resistance level and faces the 44000 support level.

• %R and MFI leave the overbought zone, with the price breaches below the DEMA and TEMA lines, giving a bearish sentiment.
• Consider a short trade if it breaks below the 44000 support level, with the target at 43300.

GBP/USD failed to climb above 1.2500 and trimmed all gains. EUR/GBP is declining and trading below the 0.8400 support level.

Important Takeaways for GBP/USD and EUR/GBP Analysis Today

• The British Pound is showing bearish signs below 1.2400.
• There is a short-term declining channel forming with resistance near 1.2280 on the hourly chart of GBP/USD at FXOpen.
• EUR/GBP is declining and showing bearish signs below 0.8400.
• There is a key bearish trend line forming with resistance at 0.8370 on the hourly chart at FXOpen.

GBP/USD Technical Analysis

On the hourly chart of GBP/USD at FXOpen, the pair started a fresh decline from the 1.2470 zone. As mentioned in the previous analysis, the British Pound struggled to extend gains and declined below the 1.2360 support level against the US Dollar.

There was a clear move below the 1.2320 level. The pair even settled below the 1.2300 level and the 50-hour simple moving average. The pair tested the 1.2250 support zone.

A low was formed at 1.2249 and the pair is now consolidating losses. On the upside, the GBP/USD chart indicates that the pair is facing resistance near 1.2280 and a short-term declining channel. The next major resistance is near the 1.2320.

A close above the 1.2320 resistance zone could open the doors for a move toward the 50% Fib retracement level of the downward move from the 1.2471 swing high to the 1.2249 low at 1.2360.

Any more gains might send it toward the 61.8% Fib retracement level of the downward move from the 1.2471 swing high to the 1.2249 low at 1.2385. If not, the pair could resume its decline below 1.2250. On the downside, there is a key support forming near 1.2220.

If there is a downside break below the 1.2220 support, the pair could accelerate lower. The next major support is near the 1.2150 zone, below which the pair could test 1.2050. Any more losses could lead the pair toward the 1.2000 support.

EUR/GBP Technical Analysis

On the hourly chart of EUR/GBP at FXOpen, the pair struggled to gain pace for a move above 0.8420. The Euro settled below 0.8400 and started a fresh decline against the British Pound.

There was a clear move below the 0.8350 pivot level. The EUR/GBP chart suggests that the pair settled below the 50-hour simple moving average and 0.8340. A low is formed near 0.8307 and the pair is now consolidating losses.

Immediate resistance is near the 50% Fib retracement level of the downward move from the 0.8389 swing high to the 0.8307 low at 0.8350.

The next major resistance could be near the 50-hour simple moving average and the 61.8% Fib retracement level of the downward move from the 0.8389 swing high to the 0.8307 low at 0.8370. There is also a key bearish trend line forming with resistance at 0.8370.

A close above the 0.8370 level might accelerate gains. In the stated case, the bulls may perhaps aim for a test of 0.8420. Any more gains might send the pair toward the 0.8450 level.

Immediate support sits near 0.8325. The next major support is near 0.8305. A downside break below the 0.8305 support might call for more downsides. In the stated case, the pair could drop toward the 0.8265 support level.

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As promised during his election campaign, US President Donald Trump introduced tariffs just two weeks after his inauguration:

→ 25% on goods from Canada and Mexico, prompting both countries to vow retaliatory measures.

→ 10% on Chinese goods, with China announcing plans to challenge the decision at the World Trade Organization.

The tariffs will take effect on 4 February. Trump acknowledged potential economic pain but justified the measures as necessary to combat illegal immigration and drug trafficking, arguing that the long-term benefits would outweigh the costs.

Trump’s decision:

→ Led to a decline in US stock indices, as analysts fear a potential trade war and global stagflation (sluggish economic growth amid high inflation). Further tariffs on Europe may follow.

→ Strengthened the US dollar, which gained around 1% against major currencies.

According to the USD/CAD chart, the Canadian dollar is trading around 1.4700 against the US dollar—a level last seen in early 2003.

On 30 January, our USD/CAD technical analysis highlighted the significance of a key trendline supporting the uptrend since last autumn. Now, by drawing a parallel line through December’s peak (A), we can identify a resistance level where the pair is currently stabilising.

A large bullish gap has also formed on the chart. The lower boundary around 1.4600 may act as technical support in the short term, though broader price movements will likely be driven by fundamental factors.

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Markets

The US Tariff Man walked the talk. From tomorrow February 4, 12:01 am EST, additional tariffs for Canadian imparts will be 25% with an exemption of 10% applying for energy or energy resources. Mexico faces a similar 25% tariff rate, again in addition to any other existing duties. The tariff rate on China will be 10%. Even though there’s a tight deadline, there’s still some room for de-escalation with White House documentation providing no explicit criteria for lifting the tariffs apart from “an improvement in the immigration and fentanyl situations”. US President Trump invoked the International Emergency Economics Power Act, to sign the executive orders, leaving US courts and a legal challenge as a wildcard. Affected countries won’t let them be bullied around. Canada already announced 25% tariffs against some C$30bn of US goods with significantly more to come (C$125bn) in three weeks’ time. They also started a national “buy Canadian” campaign in an effort to boycott US goods. Mexican President Sheinbaum also pledged retaliation with China vowing corresponding countermeasures. The US White House highlighted its “retaliation clause” suggesting the President may increase or expand in scope the duties imposed to ensure the efficacy his actions”.

The tariff escalation triggers risk aversion this morning. Main Asian stock markets lose around 3% with European and US equity futures pointing at losses of around 2.5%. Chinese markets are still closed for Lunar New Year celebration but the off-shore yuan trades back near multi-year lows (USD/CNY 7.35 area). USD strength is a global theme, but first resistance holds apart from affected countries. The trade-weighted greenback spikes from a 108.37 close on Friday to currently 109.50. The YTD top and resistance at 110.17 remains out of reach. EUR/USD set a minor new low at 1.0141 in the illiquid start of the trading week, but changes hands above the 1.0178/1.0201 support area for the moment. The picture obviously remains extremely fragile. The Canadian loonie (USD/CAD > 1.47 for first time since 2003) and Mexican peso (USD/MXN > 21 for first time since 2022) stand with the back against the wall. JPY is the only one to keep pace with the dollar, trading broadly unchanged around USD/JPY 155. The US yield curve flattens with the front end of the curve adding up to 5 bps (higher inflation threat) and the long end losing around 2 bps (hit to growth & risk aversion). We err on the side of caution this week until first dust settles.

News & Views

Belgian political parties have agreed on a government, seven months after the June 2024 elections. Bart De Wever from the Flemish nationalist party N-VA is prime minister of a five-party coalition that includes CD&V, Les Engagés, MR and Vooruit. The overarching goal is to save some €23bn to reduce the budget deficit to (below) 3% by 2030. To do so (amongst many other things) a capital gain tax of 10% on financial assets (with the first 10k exempted) is introduced, a bonus-malus system is attached to the pension system and unemployment benefits are limited in time (two years). A €6.5bn big fiscal reform includes €4.4 bn lower taxes on labour in a complementary move to incentivize people to work if they are able to. The government estimates this should in time generate around €8bn in additional revenue. Almost €5bn is earmarked for new policies, including police, justice, migration as well as defense. The Arizona coalition in its calculations assumes a 7-yr adjustment period to address the budgetary situation instead of four but this is pending on the EC’s approval. Belgium has until April to deliver a detailed budget proposal. Rating agency Fitch will have the opportunity to assess the budget this Friday. After having lowered the outlook to negative back in March 2023, it’s make or break for Belgium’s current double AA-rating.

Czech prime minister Fiala in a televised appearance yesterday said he would like for the central bank to ease monetary policy faster. His comments, accompanied by stressing he respects the central bank’s independence, come ahead of Thursday’s policy meeting. The Czech National Bank is expected to lower policy rates from 4% to 3.75%, bringing it in close proximity of what is considered a neutral rate (3.5%). Fiala also criticized CNB governor Michl for not having discussed a proposal to potentially invest some of the country’s monetary reserves in crypto currencies, including Bitcoin. The Czech crown slips to EUR/CZK 25.2 this morning in a move shared by regional peers amid general risk off.

• GBP is left vulnerable given the UK’s fragile position with a high public debt, public deficit and current account deficit.
• BoE preview – we expect the BoE to reiterate the message of a favouring gradual approach to the cutting cycle (page 2).
• We are strategically bearish on EUR/GBP; we recommend fading debt concern related rallies. Balance of risk on Thursday’s BoE meeting is for a weaker GBP.

When Chancellor Reeves presented her latest full budget accompanied by a report from the independent fiscal watchdog OBR end October 2024, she was left a historically slender headroom of GBP 9.9bn for meeting her fiscal objective. She presented an expansionary budget, which focused on increasing public investments and while partly funded by tax rises, the majority is set to be funded by increasing borrowing. As we have previously argued, we think the government is set to either roll back some of its measures or hike tax rates further at the next fiscal event in March.

With the recent rise in long-end Gilt yields and growth coming in weaker than expected by the OBR, this headroom is most likely gone, shedding a new light on the unsustainability of public finances. The combination of high interest rates, muted growth expectations and a primary deficit leaves a tricky backdrop for the UK as growth does not act as an aiding force (chart 1). Additionally, this is currently set to leave the UK unable to run with a deficit on its public finances without increasing the debt already running at close to 100% of GDP.

Hence, the fragile fiscal position combined with conducting an expansionary fiscal policy leaves the UK vulnerable to the global backdrop. Especially when we see a substantial tightening of global financial conditions, a sharp move higher in global rates combined with historically elevated levels in global long-end yields. This is further amplified in an environment characterised by a sharp sell-off in risk where liquidity becomes scarce since the UK runs a large current-account deficit, which makes GBP vulnerable whenever capital inflows fade. This scenario materialised at the beginning of the year where Gilt yields rose sharply and GBP weakened substantially.

Going forward, we expect the Labour government to either roll back some of its expansionary measures, cut spending further or hike taxes in the statement presented on 26 March to meet the budget rules. Additionally, the BoE earlier this week introduced the Contingent Non-Bank Financial Institution Repo Facility (CNRF) which will lend to NBFIs during episodes of “severe gilt market dysfunction” to help maintain financial stability. While the fragile fiscal backdrop leaves GBP susceptible to a sell-off every time focus turns to fiscal sustainability or we see a sharp sell-off in risk and long-end yields rise notably, we ultimately think this will fade, as seen most recently. We continue to be bullish on GBP as we think a relatively hawkish BoE, and a growth pickup in the UK relative to the euro area in 2025 will weigh on the cross in the coming quarters. This is further amplified by continued tight credit spreads and a return to the positive GBP-USD correlation in a USD positive investment environment.

BoE preview: a gradual rate cutting cycle remains base case

We expect the Bank of England to cut the Bank Rate by 25bp to 4.50% on Thursday 6 February in line with consensus and market pricing. We expect the vote split to be 8-1 with the majority voting for a cut and hawk Catherine Mann voting for an unchanged decision. Note, this meeting will include updated projections and a press conference following the release of the statement.

Overall, we expect the BoE to stick to its previous guidance noting that “a gradual approach to removing monetary policy restraint remains appropriate”. Since the last monetary policy decision in December, the economy has stagnated, the labour market has continued its gradual loosening while price pressures continue to be elevated. The economy ended 2024 on a weak note and the preliminary PMI data for January indicates that growth remains muted, increasing the downside risks to the growth outlook. We expect the BoE to revise growth downwards across the forecast horizon and believe the more muted growth outlook opens the door for a slight dovish twist to the BoE’s communication.

In the labour market, while conditions continue to ease with vacancies edging lower and unemployment coming in higher than the BoE expected in November, wage growth continues to spell trouble. In the private sector regular wage growth rose to 6.0% in the three months to November, set to overshoot the BoE’s Q4 forecast of 5.1%. This is likely to concern the hawkish camp of the MPC.

On the inflation front, service inflation has surprised to the downside relative to the MPC’s November expectation, dropping to 4.4% with momentum also showing signs easing. The latest PMI report for January however revealed that both input and output price pressures remain not only elevated but are gaining momentum. We expect the BoE to lift the inflation forecast in the near-term and pencil in a slight undershoot of the 2% target further out given that the more hawkish implied Bank Rate conditioning path.

BoE call. We expect the BoE to stick to quarterly cuts, leaving the Bank Rate at 3.75% by YE 2025, which is lower than markets are expecting. Markets are pricing around 75bp for 2025. However, we highlight that the risk is skewed towards a swifter cutting cycle in 2025, given the clearly dovish bias within the MPC as evident from the December meeting.

Market reaction. We expect the market reaction to be rather muted upon announcement with a cut fully expected by markets. On balance, we tilt towards a dovish twist during the press conference with downside risks to growth tentatively materialising. This could suggest some slight EUR/GBP topside and lower UK rates following the release of the statement. More broadly, we expect EUR/GBP to move lower in the coming quarters driven by a relatively hawkish BoE, and a growth pickup in the UK relative to the euro area in 2025. The key risks are reignited debt concerns and a more forceful policy easing stance from the BoE.