Instimatch - FX morning commentary - 14/3/25

Good morning

US PPI was flat in February, down from 0.4%m/m in January and below Bloomberg consensus of 0.3%m/m. Core PPI (ex-food and energy) fell 0.1%m/m, from +0.3%m/m in January. From a year ago, headline and core PPI moderated to 3.2% and 3.4%, respectively, from 3.5%y/y and 3.6% in January. Nonetheless, with core PCE inflation likely to remain above the Fed’s 2% target, with scope for a pickup due to tariff hikes, the Fed could remain patient with rate cuts. There could possibly be just two 25bp rate cuts in the rest of this year.

Meanwhile, US initial jobless claims fell 2k to 220k in the week ended 8 March compared to the prior week. This was historically low. But with the government cutting federal workers as part of its efficiency drive, there may be some labour market softness in the months ahead, which could prompt the Fed to resume policy easing in Q2. 

Upcoming consumer related data from the US today, including the University of Michigan Sentiment index and retail sales, could shed more light on the consumer outlook. Positive surprises from the data could offer additional support for the US dollar.

Yesterday, weak risk sentiment drove equities and US Treasury yields lower as markets worry about an escalating trade war. It has been a volatile week in the financial markets, where 10Y Bunds almost reached 2.95% during the week but have since declined and are trading around 2.85%. 10Y US Treasuries have also been trading in a wide range between 4.15% and 4.35% and are currently at 4.26%.  The USD index rose 0.1% in Asian trading to 104.02.

Trump escalated trade tensions on Thursday, threatening a 200% tariff on European alcoholic beverages, such as wines and champagnes, if the EU moves forward with its planned 50% tariff on American whiskey. The EU’s decision, set to take effect on April 1, comes in retaliation to the U.S.’s newly implemented 25% tariffs on imported steel and aluminium.

EUR/USD moved lower yesterday with the weaker risk sentiment above the 1.09 level.

EUR/GBP took a breather during yesterday's session after rising more than 2% since the beginning of March. While global developments remain at the front and centre for the cross, focus today returns to the release of domestic data. This morning, monthly UK GDP figures for January disappointed contracting by 0.1%m/m vs. growth forecast of +0.1% m/m, down from 0.4% in December. While the growth outlook remains subdued at present, both private and public consumption should boost growth the coming quarters. January production data undershot expectations by a substantial margin (IP -0.9%m/m and -1.5%y/y). Sterling has come under some early selling pressure following the data releases leaving GBP/USD heading lower towards $1.2900.

Tonight, we have France up for review by Fitch. France is on negative outlook by Fitch and there is a significant risk of a downgrade. Recently, S&P placed France on negative outlook. Fitch has France on AA- and a downgrade to A+ could lead to some sell-off as fewer investors will/can hold France. Portugal is also up for review by Fitch and is on positive outlook. Here we could see an upgrade like S&P did two weeks ago.

We also have Spain up for review by S&P and Greece by Moody's. Moody's has Greece on positive outlook, and we expect an upgrade given the significant economic restructuring that Greece has been doing for more than a decade. Hence, the periphery is in virtuous circle while France is in a vicious circle.

USD/JPY pair rose 0.4% overnight to 148.68, and overall, the pair is up 0.2% over a volatile trading week. 

Asian currencies had a mixed performance with the greenback already at oversold levels, we could see a near-term bounce in the US dollar, especially with incoming reciprocal tariff hikes in April. AUD/USD pair was steady around $0.6298, while USD/SGD was largely muted trading around 1.3364

The CNY has gained versus the USD lately, but it is more a story about USD weakening than CNY strength. The rate spread between US and China has thus narrowed as weaker US data has pushed US bond yields lower. PBOC continues to keep the USD/CNY fixing stable around 7.17-7.18 in line with their repeated message of a preference for stability. With the relative stability in the USD/CNY, the changes in EUR/USD transmit directly into the EUR/CNY cross and hence we have seen it move higher with the increase in EUR/USD. As we still see the USD gaining in the medium to long term, the current weaker levels of CNY should be considered to hedge expenses.