Instimatch - FX morning commentary - 14/1/25

Good morning

Ahead of the US CPI release on Wednesday markets will get the PPI print for December later today. Consensus expectations are for a 0.3%m/m print in the core categories. Key will be the components that feed into the PCE deflator due at the end of the month. The NFIB's small-business sentiment indicator likely improved further in December, after it already rose with the Trump election. In the Eurozone the only data to watch on Tuesday is Italy's industrial production. ECB's Holzman will speak at the Euromoney conference.

Market sentiment improved further overnight on talk that members of president-elect Trump’s incoming economic team are discussing a gradual approach in lifting tariffs aimed at boosting negotiating leverage while avoiding a spike in inflation. One idea would be to gradually increase tariffs by 2% to 5% each month instead of installing the floated minimum tariff of 10% to 20% on all imported goods and 60% or higher on shipments from China by stealth. Last week, the Washington Post ran an article suggesting that tariffs would only apply to critical sectors. Markets rallied in response, but rapidly retraced after president-elect Trump called the report false.

The impact effect of Friday's payrolls report was to push the 10-yr yield up to a high of 4.79% on the day. Monday then saw 4.80% level tested a few times. It's a similar story for the front end as a new high north of 4.42% was touched.  The USD index rose slightly to 109.60

The EUR market’s ECB’s expectations have repriced higher in line with the Fed as well with the central bank now seen at most cutting to a depo rate of 2% by the end of the year.  EUR/USD fell to a low of 1.0177 before recovering to around 1.0250 in early European trading on the back of tighter rate spreads.

EUR/GBP is trading around 0.8400 with the pair attracting some buying demand on dips.  Stagflation fears and UK fiscal concerns continue to weigh on GBP.  Looking ahead focus today will be on a scheduled speech by BoE’s Sarah Breeden for any fresh short-term drivers.

USD/JPY was steady around 157.60 overnight despite BoJ deputy Governor Himino indicating a potential interest rate hike in the upcoming policy meeting.  Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump's inaugural address later this month.  The BOJ's next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.

Asian FX continued to be weighed down by a stronger Dollar, higher US yields, and weak risk sentiment across the region, before paring back some losses as news emerged about Trump’s economic team discussing a gradual approach to raising tariffs.

USD/CNY remained reasonably stable at 7.332 with continued pushback against currency weakness by Chinese authorities through various tools. The PBOC is also set to decide on its benchmark loan prime rate this week.  Meanwhile KRW outperformed, perhaps partly on news that South Korea’s National Pension Service is selling Dollars to the tune of about US$50bn per month, helping to offset domestic political developments and uncertainty. USD/INR weakened past the 86.50 levels with RBI likely taking a less aggressive approach in intervening and selling USD to cap INR weakness