Instimatch - FX morning commentary - 20/1/25

Good morning

Donald Trump will be inaugurated as the 47th US President later today, at a time when the Fed’s trade-weighted real broad US dollar index is close to its strongest level in 40 years at109.06. The US dollar is also stronger today than when Trump took office during his first term in 2017. Indeed, the US dollar has gained sharply since Trump’s election victory on 5 November, with markets adjusting to partly take account of potential tariff hikes. During his confirmation hearing, US Treasury nominee Scott Bessent has said that for every 10% US tariff increase, the US dollar would appreciate by 4% to adjust for its impact.

News reports suggest Trump has prepared about 100 executive orders, which would include changes to immigration, energy, and government hiring policies. While there seems to be no news of tariffs, Trump could still implement them soon. Meanwhile, the US labour market has stayed resilient, allowing the Fed to adopt a careful approach to rate cuts this year, which will help support the greenback.

Today’s calendar in Europe is very quiet and US markets are closed in observance of Martin Luther King Day.

EUR/USD is trading back above 1.0300 in early European trading with the pair trading with a modestly bullish bias. Traders suggest the underlying USD strength/Euro weakness remains in place.  German Producer Price Index data for December released this morning came in softer than expected at -0.1%m/m vs. consensus of +0.3%.

Sterling trailed as weaker-than-expected retail sales data confirmed a mediocre narrative on the UK economy as the government tries to convince the country and markets on the viability of its economic/budgetary policy. EUR/GBP (0.8442) closed the week near the 0.845 resistance area.

USD/JPY drifted above the 156 level, following a week where the JPY generally outperformed within the G10 space. Market expectations for the BoJ meeting on Friday have risen significantly, with pricing now implying a 24bp hike, up from less than 15bp just a week ago. This shift was driven by comments from BoJ Governor Ueda and Deputy Governor Himino, both of whom suggested the central bank would consider a rate hike. Furthermore, a Nikkei report on Friday indicated that a majority of BoJ board members may support a hike, which is consistent with the BoJ's renewed focus on enhancing market transparency.

Overall sentiment toward Asian currencies remains weak.  There may still be scope for further declines in several Asian currencies in response to higher tariffs.

China remains in the crosshairs of Trump's tariff policy. With USD/CNH rising by 3.4% since the US election, markets appear to be close to pricing in the first 10% of US tariff hikes on Chinese imports. USD/CNY could also rise to 7.5000 level in response to a potential 20% increase in the effective US tariff rate on Chinese imports.

The PBOC kept its one-year loan prime rate unchanged at 3.1% and maintained the five-year rate, used for setting mortgage rates, at 3.60%.  The move, aimed at supporting a weakening yuan, sustaining liquidity, and supporting economic recovery, did little to sway market sentiment for the currency.

USD/MYR inched 0.1% lower to 4.4980 ahead of the Malaysian central bank interest rate decision. The Bank Negara is expected to hold rates steady at 3.00% for the 10th straight meeting on Wednesday due to robust economic growth and controlled inflation.

Elsewhere, AUD/USD was on the front foot up 0.2% at $0.6214, while the Singapore Dollar also benefitted from the slightly weaker USD leaving the pair trading around 1.3650.  USD/KRW pair fell 0.4% to 1449.55 amid ongoing political uncertainty in the country.