Instimatch - FX morning commentary - 22/5/25

Good morning

In terms of the US tax bill, Republicans are still working to gather a majority to approve Trump's 'Big Beautiful Bill' in Congress. House Speaker Johnson yesterday claimed that there is 'a chance' that the bill could come to a vote today. This could add renewed upward pressure on long-end term risk premia. Much seems to depend on whether the administration will manage to persuade conservative hardliners with deeper cuts in Medicaid and a faster elimination of the clean energy tax breaks in the Inflation Reduction Act (IRA).

Recent Fed commentary remains fairly balanced, with most members indicating the Fed is in a "good place," and Powell's wait-and-see stance appears to have been broadly accepted by markets. Based on current pricing, a rate cut within the next two meetings seems unlikely barring any significant surprises. The USD index eased another 0.1% lower in Asia to 99.57, falling for the fourth consecutive session.

After a relatively quiet week of data releases, today will be more interesting with the release of May PMIs. In the Eurozone the manufacturing sector was surprisingly unaffected by the trade jitters in the most recent data from April, while the services sector measure continued grinding lower. This month’s PMIs will most likely not alter the ECB's decision in June, but it could impact the sentiment on how to proceed over the summer. The calendar for today also features the release of the April ECB minutes and a string of speakers including Holzmann, Vujcic and Nagel.

EUR/USD edged higher above 1.13 as the USD remains under selling pressure in an otherwise relatively quiet week for G10 FX. Reports of FX discussions at the G7 meeting in Canada have further reinforced the market's underlying bias toward adding to USD shorts, amid ongoing speculation that the US administration is actively pursuing a weaker greenback. Traders still prefer to buy EUR/USD on dips while the CHF and JPY have been the main beneficiaries of dollar weakness.

EUR/GBP ended the day higher following the release of UK inflation data for April which surprised significantly to the topside, relative to both consensus and BoE estimate. Headline came in at 3.5% y/y (cons: 3.3%, prior: 2.6%, BoE: 3.4%) and services at 5.4% y/y (cons: 4.8% , prior: 4.7%, BoE: 5.0%). This could mean a more cautious cutting cycle from the BoE with more stagflationary tendencies with still elevated price pressures, which could be negative for GBP.

U.S. Treasury Secretary Scott Bessent and Japan’s Finance Minister Katsunobu Kato agreed yesterday that the USD/JPY rate reflects current fundamentals. USD/JPY pair fell 0.4% overnight to 143.30.

There is further speculation of possible deals on FX with the US most notably for the likes of South Korea. For South Korea, news reports suggest the US believes the fundamental cause of the trade deficit is FX, and that South Korea and the US are discussing the direction of FX in talks, but the US did not mention a specific level. With that piece of news, the South Korean won jumped to as high as 1370.75 against the Dollar, before paring back some gains.

Weaker growth and also soft inflation pressures in Asia is also one key reason for the high conviction calls for Asian central banks to increasingly cut policy rates to support growth in the region. On that front, yesterday Bank Indonesia cut its policy rate by 25bp to 5.50% in line with expectations.

Elsewhere, USD/CNH and USD/CNY were both steady while other regional currency pairs traded within tight ranges.