Instimatch - FX morning commentary - 24/2/25

Good morning

Deteriorating risk sentiment continues to weigh on commodity currencies with the JPY, CHF and USD seen to benefit.  An article in the South China Morning Post spooked investors going into the weekend. A Chinese team found a new bat coronavirus that could infect humans the same way as Covid-19.

The US Dollar Index declined 0.4% to 106.18 overnight. The greenback was already on the defensive following the release of weaker than expected US data in the shape of business activity which hit a fresh 17-month low and the University of Michigan consumer sentiment index that was revised sharply lower to 64.7 in Feb from a preliminary 67.8.

The German election makes a two-party government between the conservative CDU/CSU and the Social Democrats (SPD) the most likely result (75%), which is a positive outcome for the German economy. Markets have also reacted positively to the news with the EUR strengthening by 0.6% during Asian trading hours while DAX futures have climbed 1.1%. The conservative chancellor Friedrich Merz is certain to become the next chancellor as his party emerged as the biggest one with 28.6% of the votes. A majority government with the Social Democrats is possible because two parties fell below the 5% threshold for entering the parliament, namely the FDP at 4.33% and the BSW at 4.97%. This gives 328 seats to the CDU/CSU and SPD, above the 315 needed for a majority. A two-party "Grand coalition" government is a positive outcome because decision making is easier than in a three-party government. A new government will likely take office in two months' time.

EUR/USD is seeing some buying interest in early European trading with the pair approaching first resistance at 1.0533 (YTD top).  Belgian central bank governor Wunsch warned in the FT that the Eurozone risks sleepwalking into too many rate cuts. He’s not (yet) pleading for a pause in April, but the option should be kept open. Germany’s Ifo data is in focus.

EUR/GBP continues to hover around the 0.8300 mark while GBP/USD hit a fresh two-month high above $1.2650 with an empty domestic macro calendar for the week ahead. The UK preliminary PMIs for February came into the weak side with composite at 50.5 (cons: 50.6, prior: 50.6), services at 51.1 (cons: 50.8, prior: 50.8) and manufacturing at 46.4 (cons: 48.5, prior: 48.3). On employment, January showed the sharpest decline in private sector wage growth since 2020 due to weak demand and rising payrolls costs. Price pressures remain elevated due to high wage growth and the impending increase in employers' national insurance contribution (NIC). Following a stagnation in the second half of 2024, the UK economy remains stalled according to the PMI release.  This week, keep an eye out for a number of BoE speakers out on the wire.

In China, equity risk sentiment remained strong on the back of risk-on mood in China tech stocks, while China’s local bond yields continue to climb higher with the 10-year up from their lows to 1.79%. USD/CNH fell 0.3% to 7.2467.

The South Korean won outperformed overnight which saw USD/KRW under pressure with the pair easing 0.6% to trade around 1,426.25. The Bank of Korea (BoK) is scheduled to announce its interest rate decision on Tuesday amid a backdrop of economic challenges and political instability. Traders expect a 25bp reduction, lowering the policy rate from 3.00% to 2.75%, to help stimulate the sluggish economy. The nation's political landscape has been turbulent following the impeachment and arrest of President Yoon Suk-Yeol in December 2024. This upheaval has eroded consumer and business confidence, further dampening economic prospects. 

The Bank of Thailand is expected to lower the policy rate by 25bp to 2.0%.  The motivation for the cut is also to support growth amidst good disinflation progress.

India announced a US$10bn USD/INR buy/sell swap auction for a tenor of 3 years to help boost liquidity. The recently released minutes from RBI’s policy meeting pointed to some dovish comments from external members from the MPC, while RBI Governor Sanjay Malhotra’s comments seem somewhat more neutral, keeping the door open for rate cuts, while being cognisant of external risks. USD/INR edged up to 86.634.