Instimatch - FX morning commentary - 12/2/25

Good morning

The main event for Wednesday is the US CPI inflation data for January. The expected monthly rate of 0.3%m/m for the core is clearly too hot. And annual inflation rates of still around 3% for both headline and core underpin Powell’s message to Congress these days that there is no hurry to cut rates. Meanwhile, yesterday’s US NFIB small business optimism index eased to 102.8 in January from 105.1 in December – there was quite a substantial rise in the uncertainty index to 100 from 86. This may trigger some easing in US core inflation in the next few months.

The market has currently already scaled back expectations on Fed easing quite substantially (first additional 25bp rate cut only fully discounted by September and less than 50% chance on a next step by year end). Given this starting point, an upward surprise is probably needed to further price out Fed easing. During his testimony to the senate banking committee, Fed Chair Powell has reiterated that the Fed is in no hurry to adjust rates and remains attentive to risks to both inflation and labour market. Powell has added that long-term inflation expectations appear well anchored, while the labour market is not a source of inflationary pressures.

Apart from Powell’s second day of testimony we will also hear from Bostic and Waller, the latter will focus on stablecoins, though. The Eurozone data calendars have little to offer, although a lecture by the Bundesbank’s Nagel on the neutral interest rate could be good for some headlines.

The US dollar was modestly firmer, benefitting from US Treasury yields somewhat picking up across the curve. US dollar downside may be limited, with trade uncertainty continuing. President Trump has planned to impose broad-based reciprocal tariffs, which will tend to hurt emerging market economies more. His announced 25% tariffs on steel and aluminium imports are set to take effect on 12 March. EU has vowed to retaliate against Trump’s tariffs on metals by imposing tariffs on imports of bourbon, jeans, and peanut butter from the US.

The USD index rose slightly to 108.06 from 107.96 but remains range bound.

The Euro has been doing a little better so far this week, helped by the slight outperformance of European equities.  EUR/USD edged gradually higher throughout yesterday's session, further fueled by reports that Zelensky may be willing to swap territory with Russia in order to secure a peace deal. EUR/USD faces first intermediate resistance at 1.0442. Elsewhere traders point to the recovery in EUR/CHF. Again, the Ukraine story may be playing a role given that EUR/CHF was trading above 1.05 before Russia invaded Ukraine. A softer Swiss inflation print today and the prospect of even lower inflation next quarter (the SNB forecasts the YoY rate dropping to 0.2%) warns that upside risks to EUR/CHF may be growing. We could see 0.9500/9520 this week as investors reprice for some positive Ukraine news out of this weekend's Munich security conference.

GBP/USD is holding onto gains near $1.2450, however, the pair remain vulnerable due to a more hawkish Fed and increased trade war tensions.

The Japanese yen was an outlier among Asian currencies, weakening sharply overnight, USD/JPY rose 0.8% to 153.64.  BoJ Governor Kazuo Ueda said the central bank will continue to target its 2% inflation target, although he struck a slightly less hawkish tone than seen in recent comments. 

AUD/USD rose 0.2% to $0.6293, while the Chinese yuan’s USD/CNY hovered around 7.31 yuan. USD/SGD was steady around 1.3540, as was USD/KRW at 1,452.90. 

Meanwhile, INR gained 0.5% against the US dollar on suspected strong intervention by the RBI to 86.873, following a sharp move higher in USD/INR to the 88.00-level over recent days. The rupee's rally also comes ahead of Prime Minister Narendra Modi's meeting with US President Donald Trump this week, which may provide additional support for INR if bilateral negotiations go well.