Instimatch - FX morning commentary - 13/3/25

Good morning

German politics could dominate as the fiscal package gets a first reading in parliament. There is also busy slate of European Central Bank speakers across the dove-hawk spectrum including Holzmann, Villeroy and Nagel, but there is very little in terms of guidance policymakers will be willing to give in these highly uncertain times. The only data of note is industrial production for January.

Over in the US producer prices for February will provide more details to the inflation picture after the weaker than expected CPI print. US headline CPI inflation slowed to 0.2%m/m in February, from 0.5%m/m in January, smaller than Bloomberg consensus of a 0.3% rise. Core inflation also slowed to 0.2%m/m, from 0.4%m/m in January. Notably, core services inflation was 0.3%m/m, slowing from 0.5%m/m in January, contributing just 0.15ppt to the month-on-month headline inflation rate. Contributions from core goods, food, and energy had also eased slightly. From a year ago, headline inflation was 2.8%y/y, down from 3%y/y in January, while core inflation was 3.1%y/y, down from 3.3%y/y in January. The jobless claims will provide a more contemporaneous read of labour market conditions, but consensus is looking for only little change.

It was perhaps not a bounce, but at least a pause in the US equity market selloff. Gains were driven by last weeks' worst performers. Thus, big difference between indices with S&P500 rising 0.5% but NASDAQ 1.2%. Europe also higher with Stoxx 600 0.8%. Big rotation underneath, with investors rotating out of defensives again (consumer staples -2.5%) and into the MAG7 names.

Markets have pared back some of their rate cut expectations, the 2Y and 10Y Treasury yields inched higher by about 3bp, the 10Y US-Bund yield spread rose some 5bp from 138bp to 143bp. The broad US dollar index (DXY) has held steady in Asian trading around 103.61.

EUR/USD opens the European session around 1.0880 level. The much-awaited speech by President Lagarde's speech at the ECB Watchers conference yesterday did not provide any signals on what to expect at the April meeting. Markets have largely priced in a Ukraine-Russia peace deal, and while a small additional leg higher in EUR/USD may occur if and when Russia agrees to the truce terms. With US tariffs being rolled out, the key risk is that if upcoming data fails to validate market pessimism on the US economy, the USD could rebound quickly.

Sterling outperformed both against the dollar and even more against the euro yesterday. EUR/GBP faces short-term resistance in the 0.8450/75 range. GBP/USD is holding ground around $1.2960 as the US dollar faces headwinds amid ongoing tariff uncertainty and growing concerns over a potential US recession.

USD/JPY was steady around 147.63 overnight, the yen had firmed to its strongest level in five months against the dollar, as a mix of haven demand and bets on interest rate hikes by the BoJ offered support. The BOJ is widely expected to leave rates unchanged when it meets next week but could hike by as soon as May. BOJ governor Ueda in a response to questions in parliament, indicated that he remains confident that consumer spending will be further supported as wage rises are expected to continue.

USD/CNY pair eased 0.1% to around 7.2400, with focus squarely on more stimulus measures from Beijing to offset economic headwinds from Trump’s trade tariffs.

Meanwhile, India’s CPI inflation slowed to 3.6%y/y in February from 4.3%y/y in January, below the midpoint of the RBI’s 4% target.  This provides room for the RBI to cut the policy rate further. In addition to that, India’s industrial production rose 5%y/y in January, from 3.2% increase in December. USD/INR pair was trading modestly higher at 87.126.