Instimatch - FX morning commentary - 25/4/25

Good morning

There are mixed signals about whether there have been some talks about trade between US and China. President Trump has said his administration was engaging with China, after China denied that a talk took place and demanded the US to unilaterally remove all tariffs. Beijing has said it requires the US to show more respect, name a point person for dialogue, have a more consistent US position, among others, before agreeing to trade negotiations.

A Bloomberg report today suggested that China’s government is weighing the exemption of some U.S. goods from its 125% import tariffs.

Meanwhile, the Fed’s beige book has said that trade uncertainty has been elevated, but economic activity has so far been little changed. Tariffs were mentioned 107 times, double that seen in the prior Beige Book. Variations of the word “uncertain” were also used 89 times.  Several central banks, including the ECB and BOE, have warned about uncertainty that’s going to hurt businesses and consumers going forward.

In terms of the latest Fed speak, Fed’s Waller has said he would support rate cuts should there be a significant deterioration in the labour market. Fed’s Hammack has ruled out a May rate cut but said the Fed could cut as early as June if there’s clear evidence of where the economy is heading.

Importantly, the blackout period ahead of the Fed May meeting begins on Saturday. The Fed staying put is seemingly a done deal, unless Trump somehow causes some renewed chaos in markets before the meeting. The consensus call is for the next cut in June and expect quarterly 25bp reductions until the policy rate reaches a terminal range of 3.00-3.25% by mid-2026.

Global bond yields began to decline again given the speculation regarding rate cuts from the Fed if the labour market slows down and in order to prevent a recession in the US economy. Hence, the curves steepened from the front end of the curve as 2y US Treasury yields declined 9bp compared to a decline of 7bp in 10y segment and 5bp in the 30y segment. Hence, 10Y US Treasury yields has declined some 10bp since Trump stopped discussions regarding Fed Chairman Powell and mentioned that tariffs on China might be lowered.

Today's agenda contains no large macro data releases unless there are any major deviations in the University of Michigan revised April survey publication, traders will continue to focus on any (geo) political comments that might be coming during the day for direction.

The USD Index jumped 0.5% to 99.74 in Asian trade rebounding from losses in the previous session and after a volatile week.

EUR/USD edged higher toward the 1.14 mark during yesterday's trading session, only to fall back this morning to the same levels where we started the day yesterday (1.132). In Germany, the Ifo index for April released yesterday was surprisingly positive, not really impacted by tariffs, as was expected. 

GBP/USD continues to trade within the $1.3200-1.3400 range, but the pair has broken below $1.3300 in early European trade to currently trade around $1.3280. UK March retail sales rose 0.4%m/m vs market consensus for a 0.4%m/m drop.  GBP/USD is steady around $1.3280 despite the positive data surprise  

Tokyo inflation increased a much hotter-than-expected 3.5%y/y in April vs 2.9% in March as services prices surprised to the upside. Markets had expected a significant pick-up partly due to increases in education fee waiver programs relative to a low base from last year. Education prices rebounded to 1.6%y/y from -9.3% in March. But inflationary pressures were broader than expected but the BoJ is still expected to keep its policy rate on hold at next week’s meeting. The consensus is the BoJ will tighten when things become clearer, which will likely see the JPY appreciate further. USD/JPY jumped nearly 0.7% overnight to 143.73.

The Chinese yuan, both onshore USD/CNY and offshore USD/CNH pairs, were steady at 7.2851 and 7.2842 respectively.