Instimatch - FX morning commentary - 13/1/25

Good morning

The broad US dollar index (DXY) extended its gains by to 109.88(its strongest level since Nov 2022) following the stronger than expected US jobs data released on Friday. US nonfarm payrolls increased by 256k in December, up from 212k in November and well above Bloomberg consensus of 165k. The unemployment rate eased to 4.1% from 4.2% in November. Labour participation force remained steady at 62.5%. Average hourly earnings rose 0.3%m/m (+3.9%y/y), in line with market expectation but slightly slower than the 0.4%m/m (+4.0%y/y) pace in November.

Overall, the US labour market has continued to show resilience. This corroborates with the Fed officials’ view that the downside risk to US labour market has eased, while inflation risks are leaning to the upside due to potential inflationary policy from the incoming Trump administration.

Markets have pushed back full pricing of the next 25bp US rate cut to September 2025, from mid-2025 before the nonfarm payroll data release. US 10-year yield also rose 7bp to 4.76% last Friday, moving above the peak seen in April 2024.

This week, market focus shifts to US CPI and retail sales data, with inflation figures likely to garner particular attention. Looking ahead, traders suggest much of the USD-positive narrative is already priced in, setting a high bar for further surprises to sustain the recent rally. Themes linked to the Trump administration's policy agenda, such as aggressive tariffs, may take longer to materialise than anticipated—or fail to materialise altogether.  Positioning indicators also highlight stretched long USD positions, increasing the risk of a corrective pullback.

EUR/USD sharply declined to the low-1.02 level following Friday's strong jobs report.

It has been an eventful week in UK markets the past week. Long-end Gilt yields reached decade highs and GBP FX came under pressure as global financial conditions tightened and rates moved higher across the board, leaving the UK vulnerable given its fragile fiscal position. On the domestic front, the big event in terms of economic data is the release of December inflation data on Wednesday morning.  Consensus expects headline to remain sticky at 2.6% y/y but easing in core and services inflation. Focus will be on momentum in core services, which is key for the BoE in determining underlying inflation pressure. Traders though are cautious given that the move in UK space and GBP FX may be overdone, but still remain bearish on EUR/GBP, however, if risk appetite continues to weaken GBP will remain under pressure.

USD/JPY eased 0.1% to 157.53, given the uncertainty over the BoJ meeting later this month given news that policymakers could raise their inflation forecast as a prelude to hiking rates again.

AUD/USD pair rose 0.1% to $0.6142 after easing to a near five-year low last week.

USD/CNY is also just a whisker away from the upper bound of its trading band. The PBOC has been supporting the CNY through setting the daily fixing rate below the 7.2000 level. It will also issue CNY60 billion (US$8.2bn) of 6-month bills in Hong Kong on 15 January, boosting funding costs. And the central bank will suspend government bond purchase to temper CNY depreciation pressures.

Markets hardly reacted to better-than-expected Chinese trade data given the uncertainty around Trump’s impending return to the White House.

USD/KRW is trading marginally weaker around 1,470.17, while the USD/SGD pair rose 0.1% to 1.3728. USD/INR pair steadied around 86.40 after hitting fresh record highs.