Instimatch - FX morning commentary - 19/2/25

Good morning

Yesterday was another relatively quiet session, with broad USD strength seen across the G10 space.  The USD index was largely unchanged in Asian trading at 106.90. In focus today will be the FOMC meeting minutes from January’s meeting for more clues on the US economy.  The number of Fed officials since that meeting have repeated the likelihood for a long pause for US rates and suggests a broad consensus and means the minutes probably have little surprising or new to offer.

Marco Rubio, the US Secretary of State, and Sergei Lavrov, Russia’s Foreign Minister, led delegations in a four and a half meeting in Saudi Arabia, agreeing to “lay the groundwork for future co-operation” on ending the Ukraine war. This was the first high-level talks on the conflict since the war started in February 2022. Nonetheless, Ukraine President Zelenskky said he had not been informed ahead of time about talks, and has said that Ukraine would reject any settlement that does not directly involve Kyiv.

Meanwhile, US President Trump said he would likely impose tariffs on automobile, semiconductors and pharmaceutical imports of around 25%, with an announcement coming as soon as 2 April. Trump said he also wanted to give companies time to shift manufacturing back to the US before implementing new import taxes. This also comes on the back of a tweet overnight by Trump reiterating his plans to implement reciprocal tariffs based on a range of criteria, including tariff differentials, non-tariff barriers, taxes, and exchange rates among others. To some extent, markets continue to view these tariff announcements with a sceptical eye and are perhaps calling Trump’s bluff with regards to the magnitude of actual tariffs being implemented. Markets are perhaps too complacent at this point and see FX vol potentially rising from here.

In the near term, direction remains uncertain, with tariff and geopolitical headlines continuing to drive price action and traders expect EUR/USD to consolidate around current levels in the mid-1.04 to 1.05 area in the near term.

EUR/GBP ended the day below the 0.83 mark following a slightly stronger than expected labour market report for December/January. The unemployment rate remained steady at 4.4% in December and payrolls likewise came in higher than expected in January with positive revisions for December, although this can be largely attributed to the public sector. Wage growth excl. bonus came in in line with expectations at 5.9% in the three months to December. However, on the details, private sector wage growth ticked higher, highlighting underlying wage growth remains elevated. This is also mirrored in the underlying momentum. Overall, yesterday's report highlights that the BoE will most likely continue to stick to its "careful and gradual" approach to easing monetary policy. Inflation data for January released earlier this morning showed the headline number only dropped 0.1%m/m, pushing up the yearly figure to a quicker-than-expected 3%.  Core CPI jumped to 3.7% from 3.2% while services inflation rose to 5% from 4.4%.  This was the final inflation print ahead of the March meeting, where markets price a low likelihood of a cut. 

Traders in general remain positive on GBP on the back of a relatively hawkish BoE and a growth pickup in the UK relative to the Euro area.  This is further amplified by a correlation for GBP to a USD positive investment environment.

USD/JPY pair was largely unchanged at 151.65 after Japanese trade data suggest a modest recovery is underway in the current quarter. But the jump in exports comes with big caveats, particularly the spectre of US tariffs that cloud the outlook.

NZD/USD rose 0.3% to $0.5730 even as the RBNZ reduced the official cash rate by 50bp, bringing it down to 3.75%.  The New Zealand economy has faced significant challenges, including a recession in 2024 and persistent low inflation. In response, the RBNZ has implemented a total of 175bp in rate cuts since August 2024. 

Amongst Asia-ex-Japan markets, South Korea and Taiwan, coupled with India, Singapore, and Malaysia are probably most leveraged towards pharma, autos and semiconductor exports towards the US, but of course a lot will depend on how exactly Trump implements tariffs on these sectors.

The Chinese yuan’s onshore pair USD/CNY was largely unchanged at 7.2796, while the offshore pair USD/CNH gained 0.2% to 7.2828. The Indonesian rupiah’s USD/IDR pair rose 0.6% to 1,438.76, while the Indian rupee’s USD/INR pair was a touch firmer around 86.844. The South Korean won’s USD/KRW pair was steady trading around 1,438.86, while the Singapore dollar’s USD/SGD was modestly firmer at 1.3409.