Instimatch - FX morning commentary - 5/3/25

Good morning

Global risk sentiment has weakened, while equity volatility has spiked, as the global trade war escalates. US tariffs will likely be larger, sooner, and more pervasive this time around. US President Trump has imposed 25% tariffs on most Canadian and Mexican imports, while further raising tariffs on China by 10% following the recent 10% tariff hike in February. Canada has retaliated by imposing 25% tariffs on US$20.7bn of US imports immediately, and it will widen the scope to include another US$86.2bn of US goods if US tariffs still remain in the next 21 days. China’s retaliatory response is more measured, targeting US agricultural produce with up to 15% tariffs.

Markets have become increasingly concerned about the tariff impact on US economic growth, outweighing the risk of tariff-induced inflation. The fed funds futures markets have priced in slightly more than 3 rate cuts in the rest of this year, while the US dollar has fallen 1.4% so far this week. But given heightened global uncertainties, it remains to be seen if the recent decline in the US dollar could be sustained.

Headlines are likely to dominate markets again today, but in terms of data look out for Spanish and Italian PMIs. All of these are expected to remain at 50 or above. From the Eurozone we have PPI numbers for January, which will be watched for surprises given the ECB's communication has shifted to a more hawkish bias on inflation. From the US we have the ISM services index which is expected to remain resilient at 52.5. Other US data includes ADP employment numbers, factory and durable goods orders. With Trump's policies under scrutiny, markets may use these numbers as a gauge for his economic impact thus far. Lastly, we also have the Fed's Beige Book which contains more qualitative statements about US business sentiment.

The USD index was steady in Asian trade but remains close to recent lows at 105.57.  While the greenback is expected to benefit from America-first trade policies, traders are concerned that the resulting disruptions in global trade will weaken the U.S. economy. Recent US data showed a deterioration in both consumer spending and sentiment. 

EUR/USD is rallying on broad EUR optimism, supported by reports that Germany will establish a new EUR500bln fund for defense investments, along with renewed hopes for a ceasefire in Ukraine as Zelensky signals willingness to negotiate with Russia to end the war.

GBP/USD is holding positive ground near the $1.2800 level.  Traders remain cautious ahead of BoE Governor Andrew Bailey’s testimony later today GBP could be underpinned if forward guidance strikes a hawkish tone.

EUR/CHF has been trading in line with risk sentiment the last few days, edging up towards the 0.94 level during yesterday's session. Today, the focus is on the domestic calendar with the release of February inflation. This is the final print before the next SNB monetary policy meeting on the 20 March, where markets fully price a 25bp cut for the meeting. 

USD/JPY eased 0.1% to 149.69 during the Asian session, although the pair close to recent lows due to the improving outlook for the Japanese economy amid and narrowing interest rate differentials with the US.

AUD/USD eased to $0.6264 even as Q4 GDP data showed stronger-than-expected growth expanding 1.3%y/y vs. consensus of 1.2%y/y. The data came after the RBA cut its key rates for the first time since 2020 in its last monetary policy meeting.

NZD/USD came under some selling pressure to trade around $0.5657 after RBNZ Governor Adrian Orr said he will resign by the end of the month. 

China’s PM Li Qiang during today’s National Party Congress turned the long-rumoured 5% growth target for this year into an official one. It will be the third year straight the country seeks to grow by this much. Circumstances this time around make the goal even more ambitious. US president Trump’s import tariffs (currently standing at 20%) will bite into Chinese exports, which contributed around a third to last year’s GDP growth. China as a result turns the focus towards its domestic market. USD/CNY was steady around 7.2653 following a marginally stronger midpoint fix from the PBoC.

In Asia, India, South Korea, and Thailand are thought to be the economies most vulnerable to Trump’s reciprocal tariff hikes which are posed to go live on 2 April.