Instimatch - FX morning commentary - 24/1/25

Good morning

US President Trump's speech at the World Economic Forum in Davos yesterday did not include any new comments that moved markets. EUR/USD continued to trade around the 1.04 level and the pair has traded surprisingly stable during the first four days of Trump's Presidency. That will likely change next week, where the Fed and the ECB meet, and the first round of tariff hikes is expected.

Today the focus shifts to the data as the Eurozone flash PMIs for January will show whether the gloomy outlook for the start of the year is confirmed. The composite PMI for the bloc has not been above 50 – the neutral level – since September, which leads economists to believe that even the sluggish growth pace of the first three quarters of 2024 is too ambitious for the winter months.

UK and US PMIs will be released a little later. US services PMI is expected to show services activity continuing to expand this month. The US also sees the final University of Michigan consumer confidence release. On the speaker’s front, we will also see ECB President Christine Lagarde participating at another Davos panel again, though the blackout period means any remarks on monetary policy should remain vague.

The USD index fell 0.3% to 107.67 during Asian trading, and was set for its worst week in two months. Meanwhile, US yields have picked up at the longer end of the curve, staying elevated.

There has been some talk of unwinding of long USD positions this week after Trump's comments suggested a more lenient approach toward tariffs.

EUR/USD is testing (minor) resistance in the 1.0460 area.  The ECB is edging closer to a neutral policy stance and a re-evaluation of its easing trajectory might be on the table at the March policy meeting.

EUR/GBP has been fairly range bound the past week, trading firmly around the 0.8450 mark following the sell-off in GBP at the beginning of the year. While developments in global yields and announcement from the Trump administration continue to be at the forefront for the cross, domestic data is in focus today. The consensus for preliminary PMI's for January expects a slight downtick in both the service and composite measure. While growth ended the year on a challenging note in 2024 following a strong start, private consumption should have been boosted by government spending to prove a driving force as underlying domestic demand is set to rebound in 2025. 

NOK was about unchanged following the Norges Bank's decision to keep interest rates unchanged yesterday.

The BOJ raised its benchmark overnight by 25bp to around 0.5%, in line with market expectations. The hike is the central bank’s third raise since it began scaling back its ultra-loose monetary policy in early-2024. Japan’s CPI rose 3.6%y/y in December, from 2.9%y/y in November, while core CPI inflation (excluding fresh food) was also up by 3%y/y from 2.7%y/y in November.

The BoJ said in an accompanying statement: “Given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January Outlook Report will be realised, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation,” . 

USD/JPY fell 0.4% to 155.35 after the rate decision.

With the USD on the defensive, and prospects of the gradual imposition of US tariffs, Asian currencies posted some solid gains overnight.  The Australian dollar led the gains leaving AUD/USD up around 0.5% at $0.6316, the Singapore dollar rallied 0.4% with USD/SGD at 1.3485, Malaysian ringgit also rallied with USD/MYR down around 0.6% at 4.3980

The Chinese yuan’s onshore pair USD/CNY fell 0.4% to 7.2507, while the offshore pair USD/CNH pair eased 0.4% to 7.2520.

Meanwhile, the Chinese government has announced plans to stabilise the equity market. The government is guiding mutual funds to increase holdings of local equities by at least 10% per year for the next 3 years, while large state-owned insurers will need to invest 30% of their new policy premiums starting from this year.