FX morning commentary - 3/3/25

Good morning

Markets appear to have become more concerned about a potential slowdown in the US economy. The fed funds futures market has priced in 68bp of US rate cuts in the rest of this year, or nearly 3 cuts. US 2Y treasury yield has also dropped below 4.00%, not seen since November 2024. However, US 10Y yield has fallen more than the 2Y yield since US President Trump’s inauguration on 20 January.  However, the US dollar has recently been supported by President Trump’s renewed tariff threat, with the 25% tariff on Canada and Mexico set to come into effect on 4 March.  Commerce Secretary Lutnick this weekend said that the final level of tariffs still needs to be decided upon. The countries did “a lot” on border security, but not enough to address worries on “fentanyl deaths in America”. A delay or reduced level are still possible.

The USD index eased 0.4% in Asian trading to 107.28.

In an interview with France's Le Figaro newspaper late Sunday, French President Emmanuel Macron said that France and Britain are proposing a one-month truce in Ukraine to stop all air and sea conflict and attacks on energy infrastructure.  This came after the crisis talks held in London, in which European leaders closed ranks in support of Kyiv, pledging to spend more on security and assemble a coalition to defend any truce in Ukraine. The broader EU Council meets on Thursday to discuss a €20bn military package for Ukraine and ways to rapidly boost defence spending even if it means giving up fiscal rules.

EUR/USD dropped below 1.04 after Trump's tariff tweet last Thursday, which triggered a typical risk-off reaction and a broadly stronger USD - its first weekly gain in a month, also supported by general risk off sentiment. This week looks eventful for EUR/USD, with the key focus on whether the 25% tariffs on Mexico and Canada and additional 10% on China will be implemented or if any last-minute deals will occur. On the data front, today's ISM manufacturing report will be closely watched to assess whether the sector's rebound is extending. Euro area flash HICP for February will also be released today, and we forecast 2.2%y/y for headline (Jan. 2.5%) and 2.4%y/y for core (Jan. 2.7%). On Thursday, the outcome from the latest ECB meeting is expected to have limited market impact, as a 25bp rate cut is fully priced in and the ECB is unlikely to provide forward guidance.

Rating agency S&P put a negative outlook on the French AA- credit rating. That’s in line with Fitch while Moody’s holds a similar rating, but with a stable outlook. The negative outlook reflects rising government debt amid weak political consensus for tackling France's large underlying budget deficits, against a backdrop of more uncertain economic growth prospects.

GBP/USD tested offers above $1.2700 last week but demand weakened and there was a bout of profit taking toward $1.2720 and the pair open the European session around $1.2600.  EUR/GBP is currently holding above 0.8250.  Overall, GBP remains supported on dips as the BoE is expected to take a more cautious approach to monetary easing.

The main event of the week will be Friday's US February jobs report. Consensus forecast NFP at 158k. EUR/USD near-term risks remain skewed to the upside, particularly if tariffs are delayed and/or the US cyclical narrative continues to weaken.

USD/JPY fell 0.3% to 150.43 after a stronger-than-expected manufacturing PMI print, although the reading still remained in contraction. 

Asian ex-Japan currencies have weakened against the US dollar, as market sentiment has weakened on the back of President Trump’s renewed tariff threats.

AUD/USD was steady around $0.6210 after mixed inflation and Q4 jobs data. 

USD/CNY pair rose marginally to 7.2920 despite better-than-expected Chinese PMI data. China's February manufacturing purchasing managers’ index (PMI) rebounded to 50.2, up from 49.1 in January, beating market forecasts of 49.9. This marked a return to expansion territory after a soft January reading.  The rebound in February was led by strong bounce backs in the new orders index, which recovered to 51.1 from 49.2. Also, the production index rebounded to 52.5 from 49.8. Both sub-indices marked 10-month highs.

Caixin's manufacturing PMI also rebounded to 50.8 from 50.1, a three-month high, benefiting from an uptick in both output and new orders. This beat market forecasts for an uptick to 50.4. As a reminder, Caixin's manufacturing PMI survey respondents tend to be more centered on smaller and export-oriented companies, with a higher representation of private sector firms.

Among other Asian currencies, USD/SGD pair was flat at 1.3503, as was the Indian rupee’s USD/INR pair currently trading around 87.335. There was some talk of further FX intervention from the RBI to further support the rupee.