Instimatch - FX morning commentary - 21/1/25

Good morning 

FX markets will remain highly sensitive to US tariff news in the coming session and traders are braced for quite a bit volatility.  The broad US dollar index initially fell 1% on news reports that President Donald Trump would stop short of imposing tariffs immediately after his inauguration before posting a solid recovery. This initially helped provide a reprieve for the rest of the G10 currencies. The Euro, GBP, CAD, and SEK gained more than 1% against the US dollar.  The US 10-year bond yields have also fallen 13bp since last week, following a softer US core CPI print.

Meanwhile, Trump has ordered federal agencies to examine existing tariff policies and re-evaluate current trade relationships with China, Canada, and Mexico. Notably, the assessment will include the “phase one” trade deal with China. This shift in stance seems to suggest that President Trump may be less aggressive with tariff hikes than what he had signalled during his election campaign, and that he could use tariffs as a negotiating tool with China.

As the political dust eventually settles and the market refocus on economic fundamentals, the market's Fed pricing may still be overly hawkish, with only around 37bp of cuts priced in for the year.  Downside risks to US cyclical growth could add further pressure on the greenback. That said, for the very near-term it is all about market perception of tariff implementation.

The USD index rose 0.3% to 108.48 during Asian trading.

The main focus remains on Trump's actions in his first days as president, which is also helped by data calendars offering little else – of note is the German ZEW index given that Germany's weakness is at the centre of Eurozone economic concerns. EU finance ministers will gather in the shadow of the Trump administration’s first days, where next to discussing EU competitiveness and solidarity with Ukraine, they are also expected to adopt the recommendations for member states that are currently under an excessive deficit procedure.

EUR/USD's price action over the last day highlights the large degree of uncertainty that remains when it comes to the prospects for tariff implementation. The initial weakening of the USD suggested that tariffs were at least partially priced into EUR/USD, which has recently shown a weaker correlation with traditional drivers such as relative rates and macro data. Even in the case of some further correction traders expect the EUR/USD early December level at $1.0630 to offer tough resistance.

GBP/USD remains under pressure to trade around $1.2250 on the back of broad dollar strength.  Labour market data from the UK this morning showed that the ILO Unemployment Rate edged higher to 4.4% (consensus was 4.3%) in the three months to November.  Meanwhile, the Office for National Statistics said annual growth in weekly earnings rose by 5.6% in the three months to the end of November, up from 5.2% in the three months to October.

USD/JPY fell 0.5% to 155.50 as markets priced in a rate hike at the BoJ’s policy meeting due later this week, provided there are no market disruptions following Trump’s inauguration. The central bank is likely to reiterate its commitment to further rate hikes if the economy maintains its recovery.

Asian currencies came under renewed pressure from the stronger USD with some form of tariffs still likely to be in the pipeline.

Meanwhile, China kept its 1y and 5y loan prime rates unchanged at 3.10% and 3.60%, respectively. The Chinese yuan’s offshore pair, USD/CNH rose 0.3% to 7.2816, while the onshore pair USD/CNY was largely unchanged.

USD/MYR drifted lower ahead of the Bank Negara Malaysia interest rate decision.  The BNM is expected to hold rates steady at 3% for the 10th straight meeting. Malaysia’s exports also jumped 16.9%y/y in December, while imports were up 11.9%y/y, leading to a larger trade surplus of MYR19.2bn, from MYR11.8bn a year ago.