Instimatch - FX morning commentary - 21/3/25

Good morning

In Germany the upper house representing the states will provide the final vote on the defence- and fiscal-spending plans. It is widely expected to pass, with courts in Germany also having dismissed last ditch injunctions against a vote by the states.  

There is little other data of note on the calendar apart from the preliminary Eurozone consumer confidence reading. The ECB’s Escriva is scheduled to speak on AI in finance and from the Fed we will hear from Goolsbee and Williams.

US initial jobless claims were little changed at 223k in the week ended 15 March, remaining at relatively low levels. This underscores a still largely resilient US labour market. Nonetheless, with President Trump planning to shrink the federal workforce, some labour market weakness could be likely over the coming months. Job-cuts announcements had doubled in February, led by the government sector, while the Fed has raised its outlook for the unemployment rate to 4.4% this year, from 4.3% in its previous projections. The Philadelphia Fed business outlook slightly exceeded expectations.

US Treasury yields have continued to move lower following the FOMC meeting, with the Fed having downgraded its 2025 outlook for US GDP growth to 1.7% from 2.1% previously. President Trump has again urged the Fed to cut interest rates, as his administration prepares to unleash a wave of reciprocal tariffs on 2 April. The US 10-Y yield looks set to get below 4%.

The USD broadly strengthened across the G10 yesterday, likely driven by risk-off sentiment. Although sentiment did take a turn for the better on news that the EU could delay retaliatory tariffs until mid-April to allow for dialogue. The USD index rose 0.2% to 104.09 in Asian trade, extending gains.

EUR/USD has dipped back below 1.09 level despite lower US yields and the FOMC’s more dovish bias. 

EUR/GBP ended the day lower on the back of the hawkish vote split at yesterday's BoE meeting, where the BoE kept the Bank Rate unchanged at 4.50% in line with expectations. A further 25bp cut is expected in May with the bank rate ending the year at 3.75%.  The bias remains for EUR/GBP to move lower.

EUR/CHF ended the day broadly unchanged after the SNB delivered a 25bp cut, bringing the policy rate to 0.25%. Overall, the SNB stuck to its previous guidance noting that the SNB "will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term". The SNB signalled that risks are skewed to the downside for both the inflation and growth outlook. Market pricing suggests a final cut to the policy rate of 25bp at the next meeting in June, which would bring the policy rate to 0%. Traders continue to build long CHF positions.

The Japanese yen weakened on Friday even as stronger-than-expected CPI inflation data for February (+3.7%y/y from 4.0% in January which was higher than expected) kept traders focused on more interest rate hikes by the BoJ. USD/JPY rose 0.4% to around 149.37.

Broader Asian currencies were steady moving into the weekend

China has left its 1-year and 5-year loan prime rates (LPR) unchanged at 3.10% and 3.60%, respectively. A lack of monetary stimulus in the form of LPR cuts may have weighed on market sentiment, with the Hang Seng Index falling.  USD/CNY rose 0.1% to 7.2474 amid continued focus on more stimulus measures from Beijing. 

Meanwhile, Malaysia’s exports were up by 6.2%y/y in February, with electronics exports growing at a strong pace of 18.1%y/y. The monthly trade balance was in surplus of MYR12.6bn in February, which is wider than the MYR11.2bn surplus from a year ago. This, along with strong domestic investment pipelines, could provide some support for the ringgit. However, a potential 25% US tariffs on semiconductors could pose a significant drag on the outlook of Malaysia’s economy and the ringgit.