Instimatch - FX morning commentary - 26/3/25

Good morning 

In the UK the focus will shift from the inflation data in the morning to Chancellor Reeves' presentation of the Spring Statement. She is expected to reveal cuts in welfare and future departmental spending growth. The market’s main focus will be on the implications for the gilt remit, where around £300bn in gilt issuance is forecast for the next 12 months. Gilt remit and updated OBR forecasts are usually released shortly after the speech, which this time could be around 14:00 CET.  

In other data the only highlight is the US durable goods orders. Central bank speakers to follow are Kashkari and Musalem from the Fed and in Europe Villeroy and Cipollone from the ECB.

The USD index ticked 0.1% higher to 104.28 in Asian trading. The US 10-Y yield continues to hover around 4.30%, after US consumer data yesterday showed further signs of weakness. The Conference Board consumer sentiment index fell to 92.9 in March from an upward revised 100.1 in February. This was below market expectations of 94.0. Notably, consumer expectations also fell to 65.2 in March from an upward revised 74.8 in February, marking the lowest level since 2013. There could be some moderation in consumer spending in the months ahead, which will be a drag on the US economy.

Nonetheless, with President Trump’s tariff policy likely to lead to inflationary pressures in the near term, markets could price out the 3 US rate cuts for this year over time. A relatively modest pace of Fed rate cuts in 2025 could thus be a factor keeping the US dollar strong. Fed’s Kugler said she supports holding rates for some time, amid a move up in some measures of US consumer inflation expectations.

Back-and-forth headlines over a potential Ukraine-Russia ceasefire made for some choppy price action across asset classes. EUR/USD continues to consolidate around 1.08 in muted trade despite the latest tariff threats from Trump and more dovish ECB commentary.  After a volatile first half of the month, the EUR/USD market is calming down. One-month traded volatility has fallen to 7% from 9%, and one week has fallen to below 8% from above 11%. Stability in US asset markets has certainly helped, as has a rethink about how quickly new fiscal stimulus or defence spending stands to lift Eurozone growth.

EUR/GBP continues its steady decline lower after the sharp move higher at the beginning of March trading around 0.8340. The fundamental shift in German fiscal policy has been the primary driver. PMI data provided a lending hand highlighting the growth pickup in the UK economy.  UK's ONS reported this morning that the annual CPI inflation softened to 2.8% in February from 3% in January. This reading came in below the market expectation of 2.9% and has weighed on GBP.  GBP/USD looks vulnerable to 1.2860 and possibly 1.2800 today.

USD/JPY rose 0.4% overnight to 150.53 despite a further rise in Japan’s 10-Y yield by about 4bp to 1.58%. The BoJ minutes showed that policymakers have discussed the pace of future rate hikes. Meanwhile, Prime Minister Ishiba is planning measures to help mitigate the impact of inflation on consumers.

Onshore USD/CNY and offshore USD/CNH pair, edged around 0.1% higher to 7.2645 and 7.2728 respectively.

Tariff hikes could drive further concern for growth in Vietnam, Taiwan, Thailand, and Malaysia since they have relatively large exports to the US as a share of their respective GDP in the Asia region, and they are therefore more exposed than other regional peers to a slowdown in US import demand.

USD/IDR rallied 0.5% at one point before paring some gains, with Bank Indonesia actively intervening to protect the value of the rupiah.

Thai Prime Minister Paetongtarn Shinawatra successfully overcame a no-confidence vote in parliament on Wednesday, securing support from 319 out of 488 lawmakers present. Despite opposition criticisms regarding her qualifications and alleged family influence, this outcome underscores the stability of her ruling coalition. USD/THB pair jumped 0.5% to 33.998.