Instimatch - FX morning commentary - 10/4/25

Good morning

The Trump administration's decision to halt the planned reciprocal tariffs on most countries led to a massive rally in equities last night – the delay shifts the key date to July 8. The S&P 500 was up 9.5%, reverting around 2/3 of the drop over the past week, while tech stocks recorded the biggest one-day rise (+14%) since 2001. Markets revised the discounted year-end level for the Fed Funds rate up by 20bp following the tariff announcement.

However, Trump has raised import levies on China to 125%, given China’s retaliatory measures and its refusal to negotiate with the US. Trump had previously imposed 104% tariffs on Chinese imports, which China had retaliated with 84% tariffs on all US goods. Earlier, the EU has approved targeted tariffs of up to 25% on $21bn of US goods, including soybeans, diamonds, agricultural products, poultry, and motorcycles.

Meanwhile, FOMC minutes from the 19th of March meeting show a majority of policymakers see inflation could be more persistent and that inflation risks are tilted to the upside. Policymakers also added they are “well positioned” to respond to developments. This, along with the tariff relief, has led to markets paring back some of their fed rate cut expectation. With just 4bp of easing priced for May, the Fed appears firmly on pause.

The DXY index fell about 0.2% to 102.64 in Asian trade pulling back after a brief rebound to around 103.00 following Trump’s latest tariff. 

The ECB is widely expected to deliver another 25bp cut next week, a move already fully priced. With tariff-related headlines likely to fade near term, focus now shifts to today's US March CPI print, where consensus expects headline inflation to ease to 0.1% m/m, while core CPI is seen rising to 0.3% m/m, against this backdrop,  EUR/USD should consolidate around current levels above 1.0950 in the near term.

GBP/USD trades back above $1.2850 around $1.2870 in early European trading. Traders are keeping an eye on the long end of the UK yield curve, with the 30-Y yield at its highest level since mid-1998.  There will be some attention paid to a speech from BoE Deputy Governor for Financial Stability and MPC member Sarah Breeden who will deliver remarks at the Market News International Connect event, "UK Economic and Financial Stability Prospects," held online.  Market sentiment has shifted dovish toward the BoE, with traders increasingly expecting policy easing in response to global economic risks.

The Japanese yen remained an outlier among its Asian peers, with the USD/JPY pair falling 0.7% to around 146.60 and remaining in sight of six-month lows on sustained safe haven demand. The yen was also supported by a stronger-than-expected producer inflation reading for March, which factored into increased bets on more interest rate hikes by the Bank of Japan.

USD/CNY pair rose to its highest level since late-2007, at about 7.3511.

Chinese CPI inflation rose slightly from -0.7% y/y to -0.1% y/y in March, coming in softer than forecasts as with broad-based price pressures seen easing across the economy. At the Two Sessions, policymakers vowed a "moderately loose" monetary policy stance and noted that we'd see timely cuts in interest rates and required reserve ratios. With inflation still failing to break above zero, and the economy facing new challenges this year as the trade war has quickly escalated to full throttle, this seems a favourable period for the PBOC to provide further easing beyond the open market operations that they have been conducting in the past weeks.

Broader Asian currencies saw limited relief from Trump’s tariff de-escalation. AUD/USD - a key gauge of risk appetite- rose 0.2% to $0.6201 after falling back towards to COVID-era lows earlier this week. 

USD/INR eased 0.4% to 86.269. Reserve Bank of India cut rates by 25bp to 6.00% yesterday as expected and shifted its policy stance to “accommodative” from “neutral”. The central bank has also signaled for more rate cuts in the face of US tariffs, lowered growth for the year that started 1 April to 6.5% from 6.7% previously, while inflation was lowered to 4% from 4.2% previously.