Instimatch - FX morning commentary - 23/1/25

Good morning

There has not been a lot to get excited about this week so far in FX markets.  An impactful start on the inauguration of President Trump, but lacking on material impulse for markets, partly as it's not clear what to take seriously or what not. Data releases have been second tier and have not added much impetus either. And it does not get much better today, with US jobless claims the likely highlight (consensus is for 220k reading, indicative of the healthy US jobs market).

There was no specific mention about China tariff on Trump’s Day 1 in office. But it didn’t take long for Trump to reiterate his threat of imposing tariffs on Chinese imports. He said that his government is mulling about a 10% tariff on top of existing levies on Chinese imports, and that it could be implemented as early as 1 February, the same date he has threatened to impose 25% tariffs on Mexico and Canada. His tariff threats have widened to include the European Union on his second day in office.

Despite his tariff threats, the US dollar index has weakened to around the 108.00-level. Markets likely perceive that there will be gradual and less aggressive tariff hikes. And there is an indication of some unwinding of long US dollar positions. Actions taken by Trump so far is to order government agencies to review trade practices, which will be reported on 1 April. A 10% tariff on Chinse imports would also be a far cry from the 60% he had threatened during his election campaign. Trump still intends to raise tariffs, though markets may avoid a worst-case scenario of a 60% tariff on Chinese imports and a universal 10%-20% tariff.

EUR/USD was steady yesterday holding in a narrow channel just above 1.04. ECB policymakers today also enter their black-out period ahead of next week’s policy decision. Recent comments suggest a broad majority favour easing by 25bp. Austrian board member Holzmann is an exception. He said it could be better to wait a bit longer before lowering interest rates again

GBP/USD corrected lower yesterday but has managed to stabilise above $1.23 currently trading at around $1.2315.  A broader constructive risk sentiment also eased pressure on GBP, even as December UK public finance data showed the ever growing budgetary challenge the UK government is facing, amongst other due to higher interest rate costs. EUR/GBP hovers near 0.845.

Today's Norges Bank meeting is unlikely to change anything in terms of the near-term NOK outlook. Norges Bank is widely expected to leave rates unchanged and reiterate the message that rates will be cut by 25bp in March.

Meanwhile, USD/JPY has weakened, finding support at the 155.00 level. Without any negative Trump surprises so far, the BoJ could proceed with its rate hike tomorrow. However, any positive impact on yen may be contained, with markets already pricing in the tighter policy move and given elevated US yields.

Other regional Asian currencies remain subdued trading within fairly tight ranges on US tariff concerns. 

USD/CNY inched marginally higher to 7.2846.  Meanwhile, USD/MYR pair rose 0.2%, following the decision by the Bank Negara Malaysia to hold key interest rates steady at 3% for the 10th straight meeting. This is unlike several other regional central banks, which have cut rates in support of slowing growth. BNM has a positive outlook for growth, despite global uncertainties, while it expects inflation to remain manageable within a range of 2.0%-3.5%.