Instimatch - FX morning commentary - 25/2/25

Good morning

President Trump said tariffs scheduled to hit Canada and Mexico next month were “on time” and “moving along very rapidly” following an initial delay. Nonetheless following the remarks, a US official quoted by Bloomberg News said the fate of the special 25% levy on Canada and Mexico – tied to border security demands – was still to be determined. Meanwhile, Trump’s reciprocal tariffs that could hit all countries seems more likely to go forward in April according to the official.

Overall, while markets wait on the exact shape and magnitude of tariffs, the broader macro backdrop seems to suggest that US economic activity is slowing down and more importantly disappointing market’s expectations. Yesterday’s Dallas Fed Manufacturing Activity Index is an example, coming in at -8.3 from 14.1 previously. Meanwhile, the S&P US Services PMI was weaker than expected, with also a sharp spike in inflation expectations weighing on the University of Michigan Sentiment Index. With all that, US economic surprises have been turning downwards much more than economic surprises in the rest of the world.

From the US, the Conference Board's February consumer confidence survey is due for release. The Fed's Logan and Barkin will also be on the wires today.  Also on the data calendar is the ECB’s negotiated wages indicator for Q4 2024, which is expected to decline to 5% based on country data and timelier wage indicators.

The USD index was 0.1% lower in Asia hours at 106.59 as the greenback shows more signs of fatigue. Both the US 2-Y and the 10-Y yield are at risk of losing YTD support at respectively 4.15% and 4.38%.

EUR/USD continues to trade within the 1.04-1.05 range, as both soft US PMI data and the outcome of the German election have provided slight temporary upward momentum for the pair. Yesterday's session was relatively quiet, with the German IFO indicator holding steady at 85.2 in February. This suggests that the German economy remains sluggish, as the rebound seen in January failed to carry over into February. Key events to watch this week include inflation data from both the US and the euro area. We will get the first February CPI prints from Germany, Spain, and Italy, which are expected to confirm a continued downward trend in inflation. Additionally, Eurozone negotiated wages and credit growth will be key indicators for assessing broader economic dynamics. In the US, today's Conference Board consumer confidence data and Friday's core PCE inflation print will be in focus. Overall, EUR/USD is expected to consolidate around the 1.05 mark in the near term.

GBP/USD lost its traction after rising toward 1.2700 early Monday and ended the day marginally lower. The pair holds steady above 1.2600 in the early European session on Tuesday.

USD/JPY was the outlier in Asian trade with the JPY still in demand due to its safe haven appeal, the pair was trading 0.2% lower at 149.72.  Overall, this week so far has seen broad dollar weakness and yen strength.

Alibaba’s shares tumbled by 10% in US trading session, with China tech stocks more broadly also taking some hit, marking a sharp reversal after a run-up amid optimism about artificial intelligence in the wake of Deepseek. Trump’s latest directive to the Committee on Foreign Investment in the US to limit Chinese spending on technology and other strategic US sectors may have been a catalyst for the sell-off. Moving forward, the next focus for the market will be China’s National People’s Congress in March, where markets will watch closely for any specifics on stimulus measures.  The Chinese yuan’s offshore pair USD/CNH was largely unchanged around 7.2603.

The BoK lowered its benchmark interest rate by 25bp to 2.75% as widely expected, aiming to stimulate domestic demand amid escalating economic challenges. The BoK rate decision was unanimous, but the timing of future moves is uncertain.  The South Korean won weakened slightly leaving USD/KRW 0.2% higher at 1,430.78 won.