Instimatch - FX morning commentary - 17/2/25

Good morning

The USD sold off sharply heading into the weekend as US yields fell on several key factors. First, markets greeted Trump’s plans for reciprocal tariffs with some scepticism, while perhaps focusing instead on the delay in timing to April and with that possible room for negotiations between countries. Second, the prospect of a possible Russia-Ukraine ceasefire brokered by Trump have raised some hopes of an end to the war, with senior officials from US and Russia likely to meet in Saudi Arabia this week, even as both Ukraine and Europe have been adamant that they have a seat at the table.  Third, US retail sales came in much weaker than expected, even as part of this might be due to weather driven effects.

This week is relatively quiet on the economic data front, making it likely that political developments will continue to generate some FX volatility.  The USD index was steady during Asian trading at 106.74 and trading is expected to be thin today as US markets are closed in observance of President’s Day.

EUR/USD has edged higher to just below the 1.05 mark, and is expected to consolidate around this level for now, with the key focus on PMI releases for major economies toward the end of the week.  Notably, euro area PMIs showed some positive momentum in January, and traders will want to see if this trend continues.

GBP/USD is trading on the front foot in early European trading with the pair closing in on $1.2600 level.  Look out for UK labour market report tomorrow and CPI data on Wednesday.

USD/JPY is trading sharply lower down 0.4% at 151.75 as the yen is broadly supported following the better than expected Japan Q4 GDP, +0.7%q/q vs. f/c of +0.3%q/q thanks to solid external demand leading to better exports and capex spending.  The Japanese 10-y government bond yield this morning extends the established uptrend, touching 1.38%, the highest level since 2010.

Both AUD and NZD ended last week on a strong footing amid broadly positive risk sentiment, but this week might bring more mixed fortunes for the antipodeans. The Reserve Bank of Australia (RBA) is expected to deliver its first 25bp rate cut early Tuesday morning. Markets price in about 90% probability for the move, but especially if paired with guidance of more cuts to come, the start of the easing cycle could weigh on AUD FX. Less than 24 hours later the Reserve Bank of New Zealand (RBNZ) is set to continue its cutting cycle with another 50bp reduction according to both consensus and markets. But having already reduced policy restraint by 125bp before this week, any hawkish forward guidance about slowing the pace of cuts in the coming meetings could provide some tailwind to NZD.

Asian currencies were generally stronger heading into the weekend, with USD/CNH falling to 7.258 on the back of better risk sentiment in Chinese assets.   China’s central bank governor Pan Gongsheng said that China’s price growth and consumer demand “can be stronger” because the nation’s economy is sound and there is reduced risks from local government debt and the property market. Chinese authorities will adopt a more proactive fiscal policy and accommodative monetary policy, while also keeping the exchange rate basically stable at an adaptive and equilibrium level.

Other regional Asian currencies remain under pressure in anticipation of fresh US tariffs. USD/INR pair rose 0.3% to 16,214.4, while USD/INR pair was steady around 86.735, USD/MYR rose 0.2% to 4.4290, while USD/PHP climbed 0.4% to 57.984.

In Asia, India continues to stand out as the most vulnerable to reciprocal tariffs, notwithstanding the good personal relationship between PM Modi and President Trump and the space for negotiations for a bilateral trade deal.