Instimatch - FX morning commentary - 27/5/25

Good morning

Currency markets were subdued yesterday with both the US and UK closed for a public holiday. It’s a relatively quiet day in terms of macro-data with the US Conference Board’s Consumer Confidence report for May the highlight but also look out for Durable Goods Orders and Dallas Fed Manufacturing Index reading. In the Eurozone, focus turns to the French inflation data for May. As French inflation has been very low since February due to a publicly related lowering of electricity prices, focus will mainly be on the m/m increases as predictors of the euro area data.

Several governments from the EU have signalled that they would like to quickly reach a deal with the US to avert Trump’s threat of 50% tariff. The 50% tariff on EU has been delayed till 9 July from 1 June, providing both sides a bit more time for trade talks. Meanwhile, Japan’s trade negotiator has also indicated that he aims to conclude trade talks with US ahead of a June meeting between Prime Minister Ishiba and President Trump at the G-7 summit.

ECB President Lagarde said that global fragmentation and a shift from multilateralism will pose challenges to Europe’s export-oriented economy. However, she has also seen an opportunity to strengthen the euro’s global role as a reserve currency, which could help lower borrowing costs for businesses and shield the bloc from sanctions. That said, the euro currently accounts for about 20% share of global currency reserves, still far behind the US dollar at 58%.

However, the share of gold in global FX reserves has recently started increasing again, also reaching 20%. For the euro to become cornerstone of the financial system, Europe must first ensure it has a solid and credible geopolitical foundation by maintaining a steadfast commitment to open trade and underpinning it with security capabilities.

The USD index, fell 0.1% in Asia hours to 99.16 remaining near a one-month low.

EUR/USD traded close to 1.14 yesterday amid negative USD sentiment. In contrast, USD hedging costs have been on the rise in the XCCY basis market recently. The 1Y EUR/USD XCCY basis has widened to -6bp - the widest level since the trade war escalated in early April. Long-end EUR yields dropped slightly yesterday despite some relief on the tariff front as the market digested the decision by US to postpone the 50% tariff on the EU announced on Friday.

GBP/USD is maintaining its bullish bias close to a 39-month high of $1.3593 currently around $1.3570. The head of the UK’s Debt Management Office (DMO) told the Financial Times that the agency is shifting to shorter-term borrowing. The average maturity of UK debt is around 14 years. That’s significantly higher than the US’ +/- 6 years and longer than most other government bond markets. But UK (and global) long-term bond yields are at elevated levels over fiscal concerns and amid waning demand from institutional investors, the pension industry in particular. The UK 30-yr yield hit the highest level since 1998 last week. This is threatening the government compliance to its self-imposed fiscal rules. Chancellor Reeves as a result tweaked them in the autumn budget of 2024, was forced to cut spending and raise taxes in the spring update of 2025 and will most likely face the issue again in the 2025 autumn budget.

USD/JPY came under some modest selling pressure overnight and ended the session down 0.5% at 143.30. BoJ Governor Kazuo Ueda said that the central bank was prepared to hike interest rates further if the Japanese economy continued to pick up. This comes as data last week showed Japanese core consumer inflation rose to an over two-year high in April. A recent round of strong wage hikes is also expected to boost inflation.

AUD/USD is trading 0.3% lower around $0.6466 after the pair pulled back from a six-month high of $0.6537.

The Chinese yuan’s onshore USD/CNY and offshore USD/CNH pairs were both steady at 7.1926 and 7.1865.

USD/MYR edged 0.1% lower to around 4.2210, while USD/KRW pair was largely steady around 1,370.09.

USD/INR eased 0.2% to around 85.230. A Reuters report on Monday stated that India’s central bank is moving to internationalise the rupee by seeking approval to let domestic banks lend it to foreign borrowers for the first time.

USD/SGD was largely muted overnight at 1.2862. Singapore’s industrial production rose 5.9%y/y in April, from 6.8%y/y in March. Notably, electronics production increased by 15.2%y/y, while semiconductors production was up by 11.7%y/y. On a sequential basis, seasonally adjusted industrial production rose 5.3%m/m, from a 2.7%m/m drop in March.