Instimatch - FX morning commentary - 12/3/25

Good morning

Main data highlight is the US CPI release in which the market is looking for a 0.3%m/m core reading. While easing back from 0.4% last month, that level would still be too high and keep at least the front end from pricing a much more aggressive Fed in the near term - although the impact of tariffs remains difficult to quantify.

There is plenty interest today in CAD FX with attention on the BoC meeting at 14:45 CET - where markets and consensus favour a 25bp rate cut which would bring the policy rate to 2.75%. The expectation is that the BoC will want to ensure that the Canadian economy is well-padded against the impact of US tariffs.

EUR markets will focus on various ECB speakers as the Watchers’ conference kicks off in Frankfurt which might yield some interesting headlines. How close is the ECB to a pause or even to the bottom of its easing cycle? Speakers include President Lagarde and Chief Economist Philip Lane. The ECB will also release its forward-looking wage indicator after Lagarde pointed at “continued moderation in labour cost pressures” at the latest press conference.

In what was yet another volatile day of tariff-related whiplash, President Trump threatened to double tariffs on Canadian steel and aluminium to 50%, after Ontario announced plans to place a 25% surcharge on electricity sent to US. Things seemed to escalate further with Ontario Premier Doug Ford threatening to raise those surcharges further, before a call between Commerce Secretary Howard Lutnick and Doug Ford led to an agreement to discuss a renewed USMCA trade agreement and temporary suspension of electricity surcharges. President Trump also backed on his threat to double tariffs to 50%. 

Nonetheless, the 25% tariff increase on steel and aluminium is still set to go into effect today. It’s important to note that these tariff increases are much broader with the inclusion of derivative steel and aluminium products (although this will only be levied on the declared foreign metal content), coupled with the removal of exemptions from earlier Section 232 investigations in 2018.  Analysis by Bloomberg Economics indicates that markets such as South Korea, Canada and Mexico face the sharpest hit as they will likely see the highest rise in tariff increases, while also suffer most from the expanded product list. Markets such as Vietnam, Taiwan and Thailand will not be spared as well as they will also be hit from expanded product list

From a market's perspective, it’s interesting to note that tariff headlines have so far continued to induce further Dollar weakness with questions over US growth and US exceptionalism, although this has not been entirely broad-based and more concentrated in core G10 given the EUR positive story as well.  Economists suggest that the likelihood of a US recession in 2025 has increased to 35%, up from 15% in December, as the economic impact of new tariffs takes hold. The dollar index rose 0.2% in Asian trade to 103.56, after falling to a five-month low at 103.42.

In FI-space the sell-off continued in US and European markets as government bond yields rose and the curves steepened from the long end. 10Y German government bond yields rose some 6bp, while the 2Y segment eased 2bp.  In the US 10Y yields also rose 6bp similar to the move in the 2Y segment. 

EUR/USD has edged slightly higher over the last 24 hours, with the EUR and European currencies broadly outperforming in the G10 space amid rising optimism that Germany's debt package will be approved. Yesterday's US JOLTS job openings came in slightly above consensus at 7.740mln (cons.: 7.6mln) but saw negative revisions, leaving the data largely in line with expectations. 

Traders still favour short USD/JPY, but the pair has remained steady in the 147-148 range despite declining US yields and risk-off sentiment - typically JPY-positive factors - suggesting that further downside may be limited for now.  BOJ Governor Kazuo Ueda said that the central bank was unlikely to act on a recent spike in Japanese government bond yields, where the 10Y rate crossed 1.5% and hit a 17-year high. Ueda said market expectations for long-term rates were in line with the BOJ’s expectations. 

Broader Asian currencies were steady, USD/CNY pair edged modestly higher to 7.2406, while AUD/USD eased 0.2% to $0.6287 as the pair pulled back from a recent rebound, while USD/SGD pair rose 0.2% to 1.3328.

Meanwhile, India’s CPI is expected to show further moderation to below 4% in February from 4.3% in January, which will likely increase expectations for further RBI rate cuts. Analysts think that RBI is continuing to pivot towards growth and that the bias for INR is for it to continue to weaken through 2025.  USD/INR was steady overnight around 87.284.