Instimatch - FX morning commentary -16/5/25

Good morning

Today data will come mainly out of the US with the main focus on the preliminary May University of Michigan consumer confidence index. Sentiment is anticipated to improve somewhat following a sharp deterioration in future expectations, but the inflation survey is expected to remain elevated. Other data include import/export prices as well as housing starts. TIC flows data for March might get more scrutiny.  We continue to expect three cuts in total for the rest of 2025, maintaining our call for the terminal rate at 3.00-3.25% reached by June 2026.

ECB chief Economist Lane, deputy governors Lombardelli of the Bank of England and Seim of the Riksbank participate in a panel on "central bank communications and uncertainty" at a research conference organised by the Fed.

In geopolitics, Russian delegation head Vladimir Medinsky announced that talks with Ukraine will start this morning in Istanbul. Zelensky criticised Putin's absence, and the US expressed low expectations for the talks until a meeting occurs between Trump and Putin.

Yields declined across regions and the curve during yesterday's session, most prominently in the US. In the US, data releases were a bit of a mixed bag. Core PPI came into the weak side related to weakness in broader service price pressures and control group retail sales declined by 0.2%m/m, although this could reflect reversal of front-loading effects more than true underlying weakness. On leading manufacturing data, the Philly Fed rebounded surprisingly strongly, while NY Fed's empire index continues declining.

The US Dollar weakened overnight (The USD index was down 0.2% at 100.58) while Asian currencies had a stronger run over the past two days following some increased pricing for Fed rate cuts. The APEC meeting this week had Trade Ministers from Asian markets including China, South Korea, Japan and Taiwan jostling for meetings with US Trade Representative Jamieson Greer, with the market focused on whether FX would be a key point of discussion. Oil prices also moderated on the possibility of an Iran deal. From Asian FX markets more broadly, whether any trade deal will be struck will be key, according to Trump, India offered US a trade deal which essentially lowered tariffs across the board, a claim India came out to deny subsequently. Trump also mentioned that he was not happy that Apple was building more production in India. Whether all these are a negotiating tactic by Trump is unclear, but the good news is that there are meaningful discussions on trade between US and India and hence many still think a trade deal between the 2 are more likely than not.

In the euro area, the European Commission had scheduled to publish its spring economic forecast today, but the publication has been rescheduled for Monday following the trade war de-escalation between the US and China.  EUR/USD has recovered its daily losses, trading around 1.1215.

Decent UK GDP data kept sterling fairly well bid intraday, with EUR/GBP returning to the low 0.84 support area. GBP/USD is also creeping slowly higher to around $1.3325 on the back of the weaker dollar.

In Japan, Q1 national account data revealed a sharper-than-expected decline in GDP at -0.2%q/q (cons: -0.1%), with lower external demand at -0.8% and stagnant consumption, which accounts for more than half of Japan's GDP, in the driver's seat. Capital spending rose by 1.4%q/q, surpassing the consensus of 0.8%. The figures mark the economy shrinking for the first time of the year, underscoring the fragile recovery and complicating the BoJ's rate hike path – the market implied probability is for another 25bp rate increase at 67% by the end of the year. USD/JPY was on the defensive overnight with the pair trading down around 145.20.

The Chinese yuan’s offshore USD/CNH and the onshore USD/CNY pairs were both steady.

Traders continue to have a preference to sell USD/INR on rallies with consensus at 85.00 by Q2 2025.