Instimatch - FX morning commentary - 24/3/25

Good morning

Both Bloomberg and WSJ reported over the weekend that President Trump’s reciprocal tariffs to be announced on 2 April are likely to be narrower than initially planned. For one, the sector-specific tariffs such as on autos, pharma, and semiconductors may not be announced on the same day, according to these reports. Second, the reciprocal tariffs may not be cumulative on previously announced tariffs such as on Mexico, Canada, steel, aluminium, although in practice it is unclear how this will be applied. Third, the countries impacted by reciprocal tariffs will be focused on the top 15% of countries with largest trade imbalances with the US, or the so-called “dirty-15” as US Treasury Secretary Scott Bessent previously mentioned. The exact list of countries to be targeted are unclear, with the reports highlighting China, India, South Vietnam and South Korea in Asia, together with EU, Mexico, Japan, Canada, Australia, Brazil, and Russia, among others.

The USD had a strong end to the week, posting a third consecutive day of strengthening with EUR/USD briefly trading below 1.08 before closing just above.  The USD Index, edged up 0.1% to 104.16, after rising 0.4% last week.

Traders maintain a bearish medium-term outlook for EUR/USD, targeting a decline toward 1.06 over a 12M horizon as the shift in risk asset allocation away from the US appears structural. Longer term, the need for contractionary monetary conditions amid US growth keeping up, and supported by EU fiscal policy shifts, support the notion of elevated real rates and a strong USD. 

Friday, the German upper house of parliament, the Bundesrat, passed the large fiscal spending bill, which is set to give the German economy the largest fiscal boost in at least three decades. Hence, Germany has now made an amendment to their constitution to allow for higher defence spending, created a €500bln off-budget fund for infrastructure, and eased the constraints on regional state budgets. Focus will now turn to the implementation and funding of the package, which is crucial for the German economic outlook. In a speech Friday, ECB Stournaras noted that he sees the terminal rate at 2%, highlighting that the even the most pronounced doves in the GC do not expect the DFR go below 2%.

In terms of data releases this week, we receive the flash PMI data for March, which will be crucial ahead of the ECB's next rate decision in April. We anticipate the composite PMI to rise from 50.2 to 50.6, driven by continued normalisation in the manufacturing sector. Friday, we get the first March inflation data from Spain and France ahead of the euro area aggregate on Tuesday next week. It seems likely that the aggregate headline inflation will reach 2%, but the devil will be in the details and specifically whether domestic inflation continues to soften. It seems very likely that the PMI and inflation data will settle the market pricing ahead of the April meeting. Currently, markets are discounting around 60% probability of a 25bp cut.

Thursday marks a considerable event-risk in Norwegian markets as Norges Bank is set to announce its March rate decision. For 9 months the Norwegian central bank has guided towards this meeting as the beginning of its cutting cycle with the rate path in December indicating a 100% probability for a March cut; a message that was reiterated at the interim January meeting. Meanwhile, a cut is no longer markets' base case following both higher-than-expected realised wage growth in 2024 and the recent double (Jan+Feb) surprise to realised inflation. In fact, markets only price 6bp worth of cuts for Thursday and an accumulative 32bp for the whole of 2025.

Asian currencies remained subdued as investors assessed potential risks from upcoming U.S. trade tariffs. 

Speaking in parliament, Bank of Japan Governor Kazuo Ueda stated on Monday that the central bank remains committed to raising interest rates if core inflation moves closer to its 2% target, regardless of potential losses on its government bond portfolio. USD/JPY pair rose 0.3% to around 149.57, in line with the broader market.

In other news, data showed that Japan’s factory activity declined at the fastest pace in a year in March, with the au Jibun Bank manufacturing PMI dropping to 48.3 from February’s 49.0. The service sector also contracted, with the PMI falling to 49.5 from 53.7, marking the first decline in five months.

Meanwhile, China held its China Development Forum over the weekend, with China premier Li Qiang telling a forum of global business leaders and scholars that China is “prepared for potential shocks that go beyond their expectations and are mainly external”. Both onshore USD/CNY and offshore USD/CNH pairs, inched 0.2% higher to 7.2563 and 7.2631.

USD/THB is trading sharply higher up 0.8% overnight at 33.923. Thai Prime Minister Paetongtarn Shinawatra faces a no-confidence motion in parliament starting today.  The opposition People’s Party accuses her of economic underperformance and undue influence from her father, ex-premier Thaksin Shinawatra.