Instimatch - FX morning commentary - 10/1/25

Ahead Today     G3: US Non-Farm Payrolls

Fed officials overall highlighted that a slower pace of rate cuts is likely through 2025, with Boston Fed President highlighting “considerable uncertainty” over the US economic outlook even as she said that it was in a good place. Philadelphia Fed President Patrick Harker said the Fed can pause for a little bit but not too long, and that he still sees the Fed on a downward policy rate path even as the exact speed will depend on the incoming data. On that note, the key focus of markets will be on the non-farm payrolls print, together with the broader labour market indicators such as unemployment rate and hourly earnings. Consensus is expecting a modest slowdown but still a robust outcome at 165k, from 227k the previous month.

US labour market data has been mixed so far this week, with the ADP employment report - historically a weak predictor of non-farm payrolls - undershooting expectations, while both JOLTs job openings and initial jobless claims indicate continued labour market resilience.

In Europe the focus will be on industrial production data from Spain and France, and then retail sales from Italy.

The USD index firmed slightly in Asian trade to 109.38 to just below the strongest level since November 2022. The 10-Y UST yield is now 100bp higher than September 2024 which is helping support the greenback.  The partial absence of US investors due to a national day of mourning for ex-president Carter and the empty economic calendar kept markets squarely focused on the UK.

EUR/USD consolidated around the 1.03 mark as market focus shifts to today's jobs report.

The rise in GBP rates has come to a halt, but at 4.8% the 10-Y gilt yield has settled at a significantly higher level compared to the 3.8% low from last year. Having said that, in November the 10-Y stood at 4.6%, so not that much lower than today. The sharp rise in yields can partly be attributed to fiscal concerns but should be framed against significantly higher rates in both the US and Eurozone.

GBP FX endured another challenging day with GBP/USD extending its losses at $1.2280 and EUR/GBP briefly breaking above 0.84.  With global financial conditions tightening and rates moving higher across the board, the UK is left vulnerable given its fragile fiscal position as it runs a large public debt and deficits. Traders remain cautiously optimistic that the move in UK space is overdone, and note that there has been a slight reversal in price action, but if risk appetite continues to weaken GBP is likely to remain under pressure.

USD/JPY reversed yesterday’s losses rising 0.2% and trading back above the 158 yen level at 158.33.  Stronger-than-expected Japanese household spending data released overnight sparked increased speculation over a January interest rate hike by the BoJ, especially following the stronger than expected increase in wage growth earlier in the week.

AUD/USD pair fell 0.2% and was close to a two-year low around $0.6191, as mixed inflation data released earlier in the week fuelled expectations of earlier interest rate cuts by the Reserve Bank.

USD/CNY rose to 7.3322 levels while USD/CNH was at 7.3540. China’s CPI inflation in line with consensus but remained soft at 0.1%y/y from 0.2%y/y the previous month, while PPI was weak at -2.3%y/y. The details showed that weaker food prices, household services maintenance and cultural and education activities depressed the CPI print. Overall, the softer inflation numbers point to still insufficient stimulus and we do expect some further clarity on policy direction as we head into the National Party Congress coupled with how China may respond to Trump 2.0’s policy pronouncements.

The South Korean won’s USD/KRW pair rose 0.4% to 1.465.19 amid continued political strife in the country, while the Singapore dollar’s USD/SGD pair rose 0.1% to 1.3697. USD/INR steadied below the 86 rupee level.

Meanwhile, Indonesia’s government said it will require commodity exporters to keep part of their foreign currency earnings onshore for at least one year (from 3 months currently), in a bid to boost foreign reserves, according to Coordinating Minister for Economic Affairs Airlangga Hartarto.  The rule change should in theory help boost Dollars available onshore and to some extent guard against Rupiah volatility.