Instimatch - FX morning commentary - 27/6/25

Good morning

The big market development this week has been the sharp move lower on the US Dollar. The greenback first took another leg lower due to the Middle East ceasefire, which put downward pressure on oil prices and mitigated the tail risk of an oil spike-induced USD rally. Another key driver was a Wall Street Journal article highlighting that President Trump may select and announce Powell’s replacement by September or October 2025, much earlier than Fed Chair Powell’s end of term in May 2026, and as such raising market concerns around the possible impact to Fed independence and also the prospects for future Fed rate cuts.

More generally even putting aside the issue of the change in Fed chair, there have been growing signs of disagreement in the FOMC on the likelihood of a July rate cut which started from Governor Christopher Waller, followed by a change in tone from Governor Michelle Bowman. While other Fed speakers this week such as Mary Daly and Susan Collins still struck a cautious tone on near-term rate cuts in July, Mary Daly said a rate cut may be likely in the autumn if tariffs do not lead to a large or sustained inflation surge.

Currently, there are 64bp worth of cuts priced by year-end and 130bp through 2026; one week ago, it was 48bp and 109bp, respectively. This is quite notable in the absence of tier 1 data. Looking ahead, USD is expected to become more sensitive to data in the near term, as markets seek a catalyst to double down on recent dovish Fed speculation, with the next major trigger being the June NFP report next week. Today's May PCE print is expected to rise from the April print but is unlikely to be a significant market mover. The revised June University of Michigan consumer sentiment survey is also expected. Overall, the USD's structural decline seems to be back on track, and traders remain bearish on the USD in the medium term, targeting 1.22 over the next 12M.

Overnight, US Commerce Secretary Lutnick said the US and China ‘finalised’ the trade framework reached in Geneva. He also indicated that the US is moving to reach agreements with 10 major trading partners going into the July 9th deadline. US president Trump in this respect indicated that a deal with India might be close. Countries might be put in different ‘categories’ according to the status of deals reached (or not yet being reached). At least for now this looks like a relatively orderly framework, potentially comforting markets.

The USD index rose slightly in Asian trade to 97.40, recovering some ground after falling sharply this week.

EUR/USD has set new year-to-date highs above 1.17 against the background of the generally weaker dollar. In the Eurozone, focus turns to the June's first inflation reports from Spain and France, preceding the euro area print. Eurozone HICP inflation is expected to increase to 2.0%y/y (prior: 1.9%), driven entirely by rising energy inflation. Importantly, core inflation is expected to continue grinding lower to 2.2%y/y (prior: 2.3%), reflecting ongoing disinflation in services following an Easter-related uptick in April.

GBP/USD is holding positive ground above $1.3700 at $1.3725. BoE's governor Bailey said yesterday that employment tax hikes impact pay and jobs, not prices, amid inflation uncertainty. Despite holding rates at 4.25%, Bailey emphasised a restrictive policy stance to curb persistent inflation, with potential rate cuts expected in August, as the labour market shows signs of easing.

USD/JPY is steady around 144.47 even as June Tokyo CPI data came in weaker than expected at 3.1%y/y (prior:3.6), still above Japan’s target of 2%, and fuelling market expectations for further interest rate hikes.

Across Asia, the bigger FX movers and outperformers include the TWD, together with some partial catch-up in FX performance for the likes of oil-sensitive currencies such as INR, PHP, THB and KRW. For TWD in particular, these FX moves also come on the back of news that Taiwan life insurers’ foreign exchange losses more than doubled to $9.1bn from January through May, from less than US$4bn from January through April. While the Taiwanese regulator has been providing life insurers more flexibility in using their reserves to reduce the impact of sudden swings in the currency, with the central bank also trying to manage the pace of FX appreciation by more closely scrutinising FX inflows. The bigger macro picture in Taiwan is that while exports are incredibly strong today due to the AI boom, moving forward the combination of semiconductor tariffs coupled with the fading of front-loading of exports should directionally imply a weaker TWD.