Instimatch - FX morning commentary - 16/4/25

Good morning

The Trump administration imposed new export restrictions on Nvidia’s H20 chips to China, highlighting the company would require a license to export to China for the indefinite future, with concerns that “the covered products may be used in, or diverted to, a supercomputer in China”. Meanwhile, China imposed its own restrictions on purchases on Boeing aircraft and also related aircraft parts, as such raising the tit-for-tat retaliation between the two powers further. While the US White House Press Secretary said that “the ball is in China’s court” in terms of making the first move and offer, China would most certainly want any genuine negotiations to take place on equal footing rather than on any unilateral conditionality (as should be the case).

Meanwhile, President Trump launched a probe into the need for tariffs on critical minerals, citing national security and resilience concerns. The probe will investigate the impact of imports of critical minerals, including rare earth elements and uranium on America’s security and resilience, with tariffs likely to be imposed replacing the current reciprocal tariffs. Looking ahead, markets will focus on US March retail sales and industrial production data, together with a $13bn 20-yr US bond auction and a keynote speech by Fed Chair Powell on the economic outlook. Especially the latter could hurt sentiment further as analysts don’t expect Powell to cave to market expectations of growth-supporting rate cuts, sticking to the anti-inflation line instead.

The first two sessions of the trading-shortened Easter week developed orderly, with markets recovering somewhat from last week’s mayhem. News flow of the last 24 hours or so however suggests that the risk rebound will face a tough test.  The USD index fell 0.4% overnight to 99.68 remaining near its three-year low reached last week.

EUR/USD has pushed modestly higher in early European trade to around 1.1370 ahead of Eurozone HICP inflation data.  The ECB is widely expected to cut rates by another 25bp to 2.25% tomorrow, as growth risks have intensified on the back of US tariffs. The Governing Council may highlight rates are now close to neutral, but that doesn’t rule out further tariff-led cuts. Traders think the ECB will likely keep its options open, and markets should continue to lean on the dovish side of pricing.

GBP continues to be broadly supported and is trading close to a six-month high around $1.3250 as US VP JD Vance talked up prospects for a trade deal. This morning’s UK inflation numbers (March) were slightly lower than feared (0.3% m/m & 3.4% y/y for headline; core CPI 3.4% y/y; services CPI 4.7% y/y) and suggest that the BoE for now can stick to its quarterly cutting pace in May. EUR/GBP rises from 0.8525 to 0.8570 in the early European session.

The Japanese yen outperforms this morning with USD/JPY testing the YTD low this morning just above 142.

The Chinese yuan’s onshore USD/CNY pair rose 0.2% to 7.3273 despite data showing that China’s economy grew more than expected in the first quarter of 2025. China's Q1 growth registered a stronger-than-expected 5.4%y/y, beating market expectations for 5.2% growth. The economy is off to a much-needed strong start in 2025, as Q2 growth will likely take hits from the sharp escalation of President Trump’s trade war. Moving forward, the trade-war impact on manufacturing will be watched closely see if China’s overcapacity problem gets worse. Despite strong Q1 manufacturing activity, the industrial capacity utilisation rate fell from 76.2% to 74.1%.

Retail sales accelerated to 5.9% y/y in March, up from 4.0% y/y in the first two months of the year. This is a significant beat from market forecasts for a smaller uptick to 4.3% y/y, and represents the highest level since 2023, a year which benefited from base effects from the pandemic. Q1 retail sales grew 4.6% y/y.  

India released its CPI and trade deficit numbers for the month of March. Inflation numbers were lower than expected at 3.3% from 3.6% previously (vs consensus expectations of 3.5%y/y). Overall, this further confirms the consensus view that the RBI will continue to pivot towards growth. A further 50bp of rate cuts is expected by the RBI with risks titled towards more rather than less cuts. Meanwhile, India’s trade deficit rose to $21.5bln from $14bln previously, with stronger imports activity outweighing some short-term pickup in exports growth. USD/INR pair fell 0.3% to 85.569.