Instimatch - FX morning commentary - 20/2/25

Good morning

Yesterday was another relatively quiet session in FX markets, with broad USD strength except against the JPY and NOK.  Today is expected to be another quiet session, with only US weekly jobless claims on the agenda. A number of ECB and Fed speeches is a wildcard for trading though.  Market focus is already shifting to tomorrow's PMI releases from the US and Eurozone, where it will be key to see if momentum builds following January's surprisingly strong Eurozone PMIs. Additionally, Germany's elections this weekend could gain traction, particularly if a CDU/CSU-led coalition is formed, potentially signaling a shift in fiscal policy that could support Germany's weak growth outlook and, in turn, the EUR. 

The USD index fell 0.2% to the 107.20 level in Asia hours to 106.97. Meanwhile, US Treasury bond yields have not moved much, with the US 10-year yield still staying elevated at above 4.50%.  President Trump remains a notorious source of volatility. His after-market comments yesterday were a case in point. After slapping China with 10% of import tariffs, he said a deal with the country is still possible. It’s triggered some CNY strength this morning.

EUR/USD has remained range bound this week, trading with a slight downward bias within the 1.04-1.05 range, as FX markets largely shrugged off Trump's latest tariff threats after he proposed 25% tariffs on autos, chips, and pharma imports. The FOMC minutes for the 28-29 January meeting show the Fed is in no hurry to adjust the rate policy. This is consistent with what we have recently heard from Fed chairman Powell. Policymakers would like to see more progress in inflation before lowering the policy rate. They are also concerned that Trump’s trade and immigration policies could keep US inflation above their 2% target. Markets have continued to price in less than 2 US rate cuts this year. The minutes also indicate the Fed is considering slowing the pace of quantitative tightening. Market reaction was muted, though front-end yields edged slightly lower. 

EUR/GBP broke firmly below the 0.83 mark during yesterday's session amid higher-than-expected UK inflation data. Headline came in higher than expected at 3.0% (cons: 2.8%, prior: 2.5%), core at 3.7% (cons: 3.7%, prior: 3.2%). Services, however, were a touch lower than expected, meeting the BoE's expectation of 5.0% (cons: 5.1%, prior: 4.4%). The rise in headline was driven by fuel prices, education (VAT on private school fees), airfares but also stronger food prices. Note, this was the final CPI release ahead of the next BoE meeting on 20 March.

Meanwhile, BoJ Board member Hajime Takata has said authorities should raise rates further to contain inflation. This sends a hawkish signal to markets. The yen was up 0.6% against the US dollar, leaving USD/JPY trading at 150.52, with the Japanese currency also benefitting from safe-haven flows amid potential trade disruptions, while Japan’s 10-year bond yield has risen to 1.435%.   

Asian ex-Japan currencies were broadly stable against the US dollar in Wednesday’s session, with the Indonesian rupiah (-0.3%) being a notable exception.  Bank Indonesia kept the policy rate unchanged at 5.75% yesterday, refraining from doing back-to-back rate cuts as traders had expected, given the risks of more US tariffs and policymakers’ concern about the rupiah. BI is still looking for opportunities to cut the policy rate to support the economy.  BI’s ongoing FX intervention could have slow the pace of rupiah depreciation.

USD/CNY was steady around 7.2838, while the offshore pair USD/CNH eased 0.2% to 7.2676.

AUD/USD appreciated 0.3% to $0.6369 following the release of better-than-expected employment data for January 2025. The economy added 44k jobs, surpassing expectations, while the unemployment rate edged up to 4.1%. Earlier this week, the RBA cut rates by 25bp to 4.10% but maintained a hawkish outlook due to persistent inflation concerns. 

USD/KRW eased by 0.2% to 1,437.64, ahead of the Bank of Korea’s interest rate decision next week.  The political turmoil in Seoul that triggered sharp moves lower in the KRW has abated since January’s policy meeting.