Instimatch - FX morning commentary - 5/6/25

Good morning 

The US ADP employment report showed a gain of 37k private-sector jobs in May, missing market expectations of 114k. The softer-than-expected print followed a downward revision to April’s ADP employment to 60k, from 62k previously.  It could also presage a notable slowdown in Friday’s nonfarm payrolls. This suggests that hiring momentum is easing amid heightened economic policy uncertainty. In response, President Trump is again putting pressure on Fed Chair Powell to lower the policy rate.

Meanwhile, the ISM services PMI fell to 49.9 from 51.6 in April, indicating contraction and missing the 52.0 estimate. The report highlighted weaker new orders (46.4 vs. 52.3 in April), though ISM services employment rose to 50.7 from 49.0 in April. However, the sub-index for services prices paid jumped to 68.7 in May from 65.1 in April, pointing to a potential rise in PCE inflation.

The combination of negative economic surprises has thus weighed on the US dollar, with the broad US dollar index (DXY) falling 0.5% yesterday to currently trade around 98.89. US Treasuries have also rallied across the curve, with the 2-year yield falling 9bp and 10-year yield falling by 10bp, as the weak data prints add to rate-cut pressures. Markets are pricing in 56bp of rate cuts in H2 2025, with the first cut fully priced for September.

In what was likely a very close decision, the Bank of Canada opted to keep its policy rate at 2.75%. The market had favoured such an outcome, but economists were, in general, looking at a cut, certainly up until last week’s GDP numbers. Unemployment is in danger of breaching 7% in Friday’s jobs report, but despite a low headline inflation print, core CPI has been moving higher again with the BoC warning that “recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving.”  Traders continue to favour selling CAD against most other G10 currencies against the backdrop of new US steel and aluminium tariffs which will weigh heavily on the Canadian economy.

The ECB meeting is the main event today, but with markets fully priced for a 25bp cut to 2.0%, the reaction to such an outcome should be muted, in particular if the ECB offers little further guidance.

US data in the run-up to Friday’s payrolls report could prove more market-moving, at least for US rates. The weekly jobless claims had risen somewhat last week. If the anticipated bounce back does not materialise, it could add to the gloom instilled by the ISM on Wednesday. From the Fed, we will hear from speakers Kugler, Harker and Schmid. In politics, we will be watching the White House visit of German Chancellor Merz.

EUR/USD trades cautiously above the key 1.1400 level and ahead of the ECB rate decision. The market focus will be on the new ECB staff projections and the press conference from ECB’s Lagarde. Staff projections will probably confirm that the ECB will meet its inflation target over the policy horizon.

GBP/USD is reversing to near 1.3550 in early European trading, undermined by a renewed US Dollar upside.

Asian currencies are expected to continue finding support from a weaker US dollar, which has been impacted by policy risks. Trump’s Wednesday deadline for U.S. trading partners to submit their “best offers” for trade deals also appeared to have passed with no major agreements being announced. 

The Japanese yen weakened slightly, with USD/JPY rising 0.1% to 143.14 following weaker-than-expected wage income data for April. The reading raised questions over just how strong Japanese private consumption remained, which could cloud the outlook for growth in 2025.

AUD/USD pair fell 0.1% to around $0.6491 after weaker than expected Australian trade data for April, amid increased headwinds for the country’s key commodity exports. 

The South Korean won firmed slightly, USD/KRW eased 0.1% to around 1,360.06 after South Korean Q1 GDP data showed the economy did not contract as much as initially estimated. Sentiment towards South Korea also remained upbeat after the liberal party won the snap presidential elections held earlier this week, which could present more political stability in the country moving forward.

USD/INR was steady overnight at 85.769, although the rupee was nursing some losses this week as traders positioned for a widely expected interest rate cut by the RBI. The RBI is expected to cut rates by 25bp to 3.75% on Friday, its third such move after kicking off an easing cycle in February.