Instimatch - FX morning commentary - 18/3/25

Good morning

Risk sentiment picked up yesterday with the S&P500 up 0.6%. US retail sales while weaker than expected from a headline perspective, the components which feed into GDP was stronger than anticipated, with the Atlanta Fed’s GDP now seen rising to -2.1% from -2.4% previously. Bloomberg News reported that US Trade Representative Jamieson Greer is looking to bring more order to the upcoming announcement of new tariffs on 2 April, among other things reinstating parts of a traditional policy process including asking for public comment on the reciprocal duties. While there is still uncertainty around the severity of the upcoming tariffs, this news if right should still imply somewhat better policy implementation than has been seen since the start of Trump 2.0

Looking ahead to today’s macro data, markets will look for US industrial production coupled with Germany’s Zew expectations for possible guidance(the expectations component is seen jumping from 26 to over 48 on the back of recent developments), and ahead of FOMC later this week. Geopolitical developments are also in focus as Trump and Putin discuss a ceasefire deal. Any progress towards Russia accepting the ceasefire plan laid out by the US and Ukraine can add extra pressure on the safe-haven dollar and yen.

The USD index rose 0.2% to 103.59 in Asian trading

EUR/USD was supported by risk-sentiment during yesterdays' session rising back above the 1.09 level. EUR rates edged lower throughout yesterday's session as markets positioned for today's pivotal Bundestag vote. The SPD, CDU/CSU, and Greens collectively control 70% of seats, exceeding the 2/3 threshold required to relax the debt brake. However, passage remains uncertain, with several party members publicly opposing the bill and the risk related to abstentions—particularly from MPs who will lose their seats when the new Bundestag convenes next week.

EUR/GBP remains largely unchanged for the second consecutive session trading around 0.8410 during Asian trading hours.  Meanwhile, GBP/USD has eased back toward $1.2950, the pair faces headwinds from the rebound in the greenback amid intensifying trade and increased Middle East tensions.

The big event for CHF this week is the SNB meeting on Thursday where markets expect a 25bp cut to 0.25% for the meeting. Traders suggest this will be a close decision however given the recent weakening of the CHF and the limited space left for easing. Ultimately, the muted inflationary pressure with headline currently around 0.3%y/y will still likely see the SNB opting for a cut. Overall traders remain bullish on CHF and expect the recent weakening to prove temporary.

Amid risk-on sentiment yesterday USD/JPY is trading above 149 yesterday at 149.85. The BoJ is widely expected to keep rates unchanged this week but present a hawkish stance in this week’s meeting. Reflation momentum remains intact in Japan after big corporates decided to meet their unions' high wage in demands last week.

Assistant Governor of the Reserve Bank of Australia (RBA) Sarah Hunter confirmed the recent assessment of other board members including Governor Michelle Bullock that the RBA is more cautious than the market about the prospect for further rate cuts. The RBA at the February meeting for the first time reduced its policy rate by 25bp to 4.10% after having kept it unchanged since November 2023.  Markets currently see a chance of about 70% of an additional rate cut at the May meeting. A third rate cut is discounted by autumn. AUD trades near $0.637, compared to sub $0.615 levels in January.

China’s Jan-Feb macro data yesterday while mixed showed some acceleration in industrial production, retail sales and fixed investment, although this was tempered by a still weak property market and loan demand. USD/CNY consensus forecasts have been revised lower to 7.40 from 7.50 for Q2, and China 2025 GDP forecast to 4.6% from 4.5% previously.

USD/IDR rallied 0.6% to 16,479.7 on the back of a weaker Indonesian rupiah.  A Reuter’s poll suggests that Bank Indonesia is set to keep interest rates unchanged tomorrow to help support the beleaguered currency amid rising global trade tensions.

India released its trade deficit number yesterday which was much smaller than expected at $14bn from $23bn the previous month. Part of this was due to lower gold and oil imports due to higher prices for the former. Nonetheless, at least part of this smaller deficit was due to weaker consumer goods and capital goods imports and may be indicative of softer domestic demand. Traders think INR should still be biased weaker, with a central bank which is pivoting towards growth and likely to cut rates further moving forward, coupled with uncertainty around the impact of reciprocal tariffs on India.