Instimatch - FX morning commentary - 25/6/25

Good morning

In the Middle East conflict, a fragile US-brokered ceasefire began between Israel and Iran, with early accusations of violations from both sides. Despite tensions, the ceasefire appears to be holding for now, as Israel lifted emergency measures and Iran's president declared an end to the 12-day war. Israeli PM Netanyahu claimed Israel had disabled Iran's nuclear project, but a preliminary classified US report stated the strikes only delayed Iran's program by months. Netanyahu warned of full force action if Iran tries to rebuild. 

The major macro event yesterday was Fed Chair Powell’s semi-annual policy testimony to the House Committee on Financial Services. Powell said that the US economy is still strong, allowing the Fed to maintain a wait-and-see approach for now, while it learns about the effects of tariffs on inflation. Regarding policy direction, he said that “many paths are possible”. If inflation is softer than expected, it could support earlier rate cuts, though there is no pre-set schedule for easing. But if inflation or a resilient labour market continues, that could push back policy easing. For now, the Fed expects to see inflation pick up in June, July, and August due to higher US tariffs.

Several other Fed members also spoke. Fed’s Barr has stuck to the Fed script, emphasising that the Fed is well positioned to pause rates for now, cautioning that tariffs could raise inflation. Similarly, Fed’s Williams said it is “entirely appropriate” to stand pat for now. But he expects the unemployment rate to rise to around 4.5% by year-end and inflation to come in around 3% due to tariffs.

Today is a relatively quiet day in terms of macroeconomic data. In the US, Fed Chair Powell returns to Capitol Hill for a testimony before the Senate Banking Committee, following his appearance yesterday before the House Financial Services Committee. Fed's Goolsbee will also be on the wire.

The US dollar and oil prices fell as the ceasefire between Israel and Iran came into effect. The USD index fell marginally overnight to a low of 97.85 and close to the 96.7 year to date low.

The EUR/USD rally stalled again in the 1.160-1.165 area and it is plausible markets may require a more compelling macro story (most likely from the US) rather than the mere unwinding of geopolitical risks for a break higher.  That said, EUR/USD remains predominantly a dollar story, and the market’s blatant disliking of the greenback – confirmed by limited gains during the Middle East turmoil – means the upside potential remains intact.

The broader risk-off move also supported a comeback of sterling (EUR/GBP 0.853 from 0.856) even as BoE Bailey in a hearing before Parliament admitted that the UK economy/labour market is heading for some excess capacity, supporting further gradual easing.

USD/JPY pair eased by 0.1% to 145.10. Overnight the BoJ's June policy meeting summary highlighted a division among policymakers, with board member Tamura advocating for decisive interest rate hikes to address rising inflation risks, contrasting with Governor Ueda's call for a pause due to ongoing US trade uncertainties. While the BoJ kept rates steady at 0.5% on June 16-17, Tamura's hawkish stance underscores the board's split between managing inflationary pressures and assessing the economic impact of US tariffs.

AUD/USD was steady overnight, even as data showed CPI inflation grew much less than expected in May. Headline CPI inflation fell to a seven-month low, while underlying inflation as represented by annual mean inflation eased to an over three-year low. Wednesday’s print showed a sustained downturn in Australian inflation, which in turn gives the RBA more headroom to keep cutting interest rates. The central bank has flagged a largely data-driven approach to further monetary easing. The RBA cut rates by a cumulative 50 basis points so far in 2025. 

The Bank of Thailand unexpectedly cut its benchmark one-day repurchase rate by 25bp to 2.00%, a move it said was a response to a weaker growth outlook and increased risks posed by global trade policy uncertainty.

KRW led regional gains against the US dollar, rising 1.7% yesterday, reversing a 0.8% loss in the prior day.