Instimatch - FX morning commentary - 20/3/25

Good morning

The UK will get some attention with the Bank of England decision later in the day. Traders expect the BoE to keep the Bank Rate unchanged at 4.50% in line with consensus and market pricing.

The UK labour market data released this morning showed that the unemployment rate stayed at 4.4% in the three months to January in line with consensus. Additional details of the report showed that the number of people claiming jobless benefits increased by 44.2K, compared with a gain of 2.8K in January, higher than the 7.9K estimate. Meanwhile, Average Earnings, excluding Bonus, in the UK rose 5.9% 3M year on year) in January versus a 5.9% growth booked previously. Markets expected a 5.9% print.

But overall, the UK for now is a sideshow, with the main drivers being Europe’s incoming spending splurge on the one hand and the growing US outlook concerns plus looming tariff decisions on the other. The former puts the European Central Bank in a tighter spot as rising yields have tightened financial conditions already – we will be hearing from Lagarde and Lane among others today while a European Union summit kicks off to further discuss the defence plans. The latter means that US releases like the weekly initial jobless claims can be more influential data – even as those are seen little changed on Thursday but any surprise could be more disruptive.

The Fed held the policy rate unchanged as widely expected, while saying that the uncertainty around the economic outlook has increased. The Fed has revised down its 2025 outlook for US GDP growth to 1.7% from 2.1% previously, while raising its forecasts for core inflation this year to 2.8% from 2.5% previously and the unemployment rate to 4.4% from 4.3% previously. The median dot for this year remains at 3.9%, or two 25bps rate cuts in 2025, and there is a strong cluster around that. Market pricing for about 60bp of rate cuts this year or 3.7% by end-2025 is also comparable with the latest dot plot.

The BoJ also held rates at 0.5% as expected. BOJ Governor Ueda has appeared less hawkish at the press conference, which could contain yen strength. Ueda has acknowledged large uncertainties over the economic impact of US tariffs, mentioned that the bank will not raise the policy rate when the economy is in a bad condition, while adding that service price increases are not that strong. That said, Ueda has signalled that the bank is currently comfortable with the current pace of rate hikes. He has also acknowledged the slightly stronger wage increases of 5.46%, based on data from Japan’s Trade Union Confederation. The BoJ is likely to remain on a gradual rate normalisation path.

The USD index fell slightly in Asian trade to 103.46.

Russia-Ukraine ceasefire talks continued yesterday and signalled further progress towards a deal, but with limited reaction in EUR/USD. The next ECB rate cut is expected in June and that the rally in EUR/USD will start to top out around the 1.09 level, the Euro is struggling this morning ahead of an important EU summit the next two days during which EU leaders are to agree on specific defence spending measures. The EC further detailed its Rearm Europe proposal yesterday. It allows 1.5% of GDP in defence spending to be exempted from the 3% deficit rule for the next four years, starting in 2025.

The UK’s labour market report on balance came in close to expectations. But with the BoE meeting scheduled for later today (status quo expected), sterling’s initial reaction has been muted so far. EUR/GBP trades unchanged around 0.838.

The Japanese yen was among the better performers, moving back towards its strongest levels in five months on sustained safe-haven demand, and as focus remained on more tightening by the Bank of Japan. But Japanese markets were closed for a holiday, keeping broader Asian trading volumes muted. The USD/JPY pair fell 0.2% to 148.23. 

Lower US yields and a softer US dollar following the FOMC meeting could help provide some short-term support for Asian currencies.    

Australian labour market data for Feb showed an unexpected contraction, adding to expectations for further rate cuts. AUD/USD eased 0.2% to $0.6338.

USD/CNY rose slightly to 7.2355 after the PBOC kept its benchmark loan prime rate unchanged at record lows. Focus remained on more stimulus measures from Beijing.