Instimatch - FX morning commentary - 22/1/25

Good morning

The main focus in EUR rates will be on the ECB speakers who are speaking at the Davos World Economic Forum. Villeroy will speak on “where are interest rates going”. President Lagarde speaks at a panel on “unlocking Europe’s potential”, although she will also participate at a “global economic outlook” panel on Friday which seems more likely to generate relevant headlines.

The data calendar offers only second tier data with US mortgage applications and the Conference Board’s leading index the only releases of note. 

President Donald Trump has signed several key executive orders. He granted pardons for those people involved in the US Capitol attack on 6 January 2021. A national emergency at the US-Mexico border was declared to clamp down on illegal immigration. Trump will pull US out of the Paris Climate Agreement and the World Health Organization, support oil production, and withdraw support for renewable energy. He has also put a freeze on government hiring, except for the military and other unnamed parts of the government.

Trump did not immediately raise tariffs and this has provided some respite for the rest of G10 and Asian currencies. Given markets have been piling into the long USD trade heading into Trump’s inauguration, those bets are susceptible to a potentially less aggressive pace of tariff hikes which is currently weighing on the USD.  Nonetheless, some form of tariff hikes is still likely in the pipeline. Trump has repeated his threat of imposing 25% tariff on Canada and Mexico on 1 February. Canadian Prime Minister Trudeau has said he will retaliate in kind if Trump imposes tariffs. Amidst heightened global trade uncertainties, the greenback’s decline could be contained.

The US Dollar Index rose 0.2% during Asian trading to 108.16, after losing more than 1% at the start of the week. In the context of persistent uncertainty, traders expect the downside in the USD to be limited in the short-term.

EUR/USD struggles near $1.0400 with the pair still under scrutiny as Trump’s tariff warning on the EU dominate.  ECB hawk Klaas Knot said earlier today that he “sees little obstacle to another rate cut next week.” Separately, his colleague Yannis Stournaras said that “rates should be close to 2% by end of the year.”

EUR/GBP remained fairly range bound during yesterday’s session around the 0.8450 mark. The labour market report for November/December came out fairly in line with expectations. The unemployment rate increased as expected to 4.4% in November (from 4.3%) and vacancies continue to trend lower signalling a cooling trend in the jobs market. Wage growth remains elevated with wage growth ex- bonus coming in a slightly hotter than expected at 5.6% 3M/y/y (cons: 5.5%, prior: 5.2%) with a tick up in private sector wage growth as well but mainly due to base effects and upward revision to the two prior months included in the print. But with gradual cooling in the labour market this should take the pressure off the coming months.

USD/JPY extended its sideways move at 155.90 ahead of the BoJ’s two-day policy meeting starting tomorrow.  The central bank is widely expected to raise interest rates on Friday. Reuters reported last week that the central bank is likely to reiterate its commitment to further rate hikes if the economy maintains its recovery.

Asian currencies remain under pressure, despite expectations that Trump’s new tariffs would be implemented gradually. If enacted at their full scale, these tariffs could have a substantial impact on most Asian currencies, given the region's heavy dependence on trade with China.

USD/CNY has moved lower in recent days from 7.33 to 7.28.  Trump has ordered a study of China’s adherence to the phase one deal he made in his first term.  He has also warned of tariffs on China unless they sell 50% of TikTok and talked about tariffs as punishment for fentanyl trade. But it leaves a picture of no clear strategy, which has provided some hope in markets that tariffs will not be as high as feared - and at least not coming as fast. The study of the phase one deal, however, will reveal that China only bought less than 60% of the goods promised and will likely pave the way for tariffs. It is also not clear China will accept selling part of TikTok, which also sets the stage for a confrontation.

Bank Negara Malaysia is expected to hold rates steady at 3.00% for the 10th straight meeting due to robust economic growth and controlled inflation. The Malaysian ringgit jumped 0.6% against the U.S. dollar, with the USD/MYR pair falling to 4.4500 ringgit.