Instimatch - FX morning commentary - 12/5/25

Good morning

Key focus for FX markets today will be digesting news of trade negotiations between the US and China that took place over the weekend in Switzerland with a mutual statement expected today. The consensus expectation is for tariffs to be lowered to around 60% in the first round. Final ECB comments ahead of the blackout period starting on Thursday will also get some attention. Key will be whether improving risk-sentiment and improvement on trade negotiations will trigger a return to the more hawkish reaction function within the ECB that prevailed prior to Liberation Day.

U.S. and China officials concluded trade talks in Geneva, saying a trade deal had been struck, although they did not offer any more details. U.S. Treasury Secretary Scott Bessent described the discussions as "substantial progress," while Chinese Vice Premier He Lifeng noted an "important consensus" was reached. Both sides agreed to establish a new economic dialogue mechanism, though specific details are expected to be released later on Monday.

 Traders were hopeful that the agreement might lead to a reduction in the steep tariffs imposed by both countries during the recent tensions.

In the Ukraine-Russia war, President Zelensky has agreed to meet President Putin in Turkey on 15 May, following Trump's urging to engage in direct talks. Putin's proposal follows significant pressure from major European powers in Kyiv, who demanded Putin to agree to a 30-day ceasefire or face 'massive' sanctions. Zelensky initially insisted on the ceasefire before negotiations. Trump, however, pressed for immediate talks, emphasising the potential to end the conflict.

India and Pakistan reached a ceasefire agreement on Saturday, after the nuclear-armed neighbours engaged in their worst fighting in decades. The U.S.-mediated ceasefire in the Kashmir region appeared to be holding, as reports indicated a reduction in artillery fire and drone movements along the India-Pakistan border since early Sunday.

The improved risk-sentiment from last week is likely to continue today as the USD index has consolidated near three-year lows, the index rose 0.2% in Asian trade to 100.67.  Concerns about the US hard-data outlook persist, and potential asset allocation shifts away from the US continue to pose medium- to longer term headwinds for the USD.

Traders continue to prefer to buy EUR/USD on dips and maintain their bearish USD view, targeting EUR/USD around 1.20 by year-end. On credit ratings this week, Portugal is up for review by Moody's. Greece is up for review by Fitch. Greece and Portugal have been on stable outlook since 2023 by Fitch and Moody's, respectively, and the outlook is expected to be changed to positive.

GBP/USD has come under some early selling pressure in European trading back below $1.3300 at $1.3283. The downturn in UK hiring activity eased in April according to the latest KPMG & REC UK report on jobs. Both permanent placements and temp billings fell at softer rates compared to March amid reports of weak employer confidence and tighter hiring budgets. REC commented that “the biggest single drag factor on activity right now is uncertainty, some of which can’t be helped but payroll tax costs and regulation design is in the Government’s gift”.

USD/JPY rose 0.4% overnight to 146.00. Doubts over a potential US-Japan trade deal intensified after Japanese Finance Minister Katsunobu Kato seemed to suggest Japan might threaten selling some of its US Treasury holdings as part of trade negotiations with the White House.

Asian currencies came under pressure following the positive developments for the greenback.

USD/CNY pair fell 0.2% to around 7.2274 amid easing trade tensions between Washington and Beijing.

In other news, data over the weekend showed that China’s inflationary pressures persisted in April, with consumer prices declining for the third consecutive month and factory-gate experiencing their sharpest drop in six months.

USD/KRW pair rallied 0.6% to 1,403.11, USD/SGD pair ticked up a more modest 0.1% to 1.2984, while USD/MYR gained 0.4% to 4.2970. The Indian rupee’s USD/INR pair fell 0.9% overnight to 84.621 rupees.