Instimatch - FX morning commentary - 12/6/25

Good morning

President Trump confirmed a deal is done with China following two days of bilateral talks in London. However, details were sparse and lack clarity, particularly on the tariff rate. Nonetheless, the US tariff rate on Chinese goods will likely stay higher than before Trump’s second term in office. This, combined with a softer-than-expected US CPI print in May, has weighed on the US dollar.

US headline CPI inflation edged up to 2.4%yoy in May, from 2.3%yoy in April, aligning with market expectations. Core CPI (ex-food and energy) held steady at 2.8% YoY, slightly below the Bloomberg consensus forecast of 2.9%. On a seasonally adjusted basis, core CPI rose just 0.1%mom, down from 0.2%mom in April and below market expectation of a 0.3%mom increase. This brings the 3-month annualized pace of core CPI to a modest 1.7%, signalling continued disinflationary momentum.

Notably, core services inflation (excluding energy) rose by less than 0.2%mom in May. Aside from a muted reading in March, this marks the slowest pace since February 2021, possibly reflecting a broader softening in the US economy. Core goods inflation also continued to ease. Most significantly, new vehicle prices declined by 0.3%mom in May. While core goods prices could face upward pressure in the coming months due to higher import tariffs, it remains uncertain whether this will be enough to offset the disinflation in services.

Markets will now turn their attention to the UK where we have monthly GDP, industrial production and manufacturing numbers. With the more dovish data earlier this week, these may be more scrutinised by markets than usual. The US will publish the PPI numbers for May, which will be closely watched after the benign CPI. Jobless claims are expected to nudge slightly lower from last week. Other than data we have a long list of ECB speakers on the agenda. With a more hawkish-than-expected press conference last week, traders will be listening for nuances in their views. 

Oil prices in commodity markets are worth following closely. Tensions between the US and Iran are rising. A 60-day deadline set by Trump to strike a nuclear deal expires today. The US’ warning to consider military options if diplomacy fails was met with a retaliatory tone by Iran. Brent crude shot up $4 on the barrel intraday before closing just south of $70, still the highest since the Liberation Day crash.

The USD index eased 0.3% in Asia hours to open the European session around 98.31. US 10y yield around 4.40% vs. 4.50% prior to the soft US CPI print.

EUR/USD pushed higher above 1.15 to trade around ECB's Villeroy repeated yesterday that the ECB is in a "favourable" position but noted that this did not mean that policy is "static" and "I don't believe there is deflation, although if ever it materialized the ECB would have the necessary tools to react." This highlights that the scope is there for another cut to materialise, but that July is likely too close. Analysts expect the next and final cut at the moment in September.

UK Chancellor Reeves’ spending review outlined three years of expenditures to build roads, railways, houses and energy projects but that didn’t inspire sterling bulls. The pound extended the drop that was instigated by Tuesday’s labour market report. EUR/GBP rose to its highest level in a month at around 0.848.

The risk-sensitive AUD may find challenges as the tensions also continue to escalate in the Middle East after the US advised some Americans to leave the region. President Trump said that the US would not permit Iran to have a nuclear weapon.  AUD/USD fell 0.2% to $0.6502.

Meanwhile, an improving outlook for Asian local government bonds is providing a tailwind for regional FX. Notably, Indonesia’s 10-year government bond yield fell to 6.748%, its lowest level in seven months, amid sustained foreign interest. Net foreign bond inflows extended to a sixth straight month in May, with inflows totalling $1.8 billion last month. Similarly, Malaysia saw $2.9 billion in net foreign bond inflows last month, marking the third straight month of net inflows. These inflows reflect growing investor confidence in several Asian government debt, supported by disinflation trends and expectations of monetary easing across the Asia region.

The Chinese yuan’s onshore USD/CNY and offshore USD/CNH pair were both trading 0.2% lower overnight at 7.1808 and 7.1839 respectively.

USD/KRW fell sharply by 0.8% to 1,357.57 on optimism around newly elected President Lee Jae-myung’s promise to eradicate unfair trade practices in South Korea’s capital markets and restore investor trust.

USD/SGD was largely flat at 1.2812, while the Indian rupee’s USD/INR was also steady trading within tight ranges around 85.505.