Instimatch - FX morning commentary - 6/1/25

Good morning and welcome back after the holiday break.  

Ahead Today     G3:         US: S&P Global US services PMI, factory orders, durable goods orders; Eurozone composite PMI

Today marks the first real trading session in the New Year amid last week's sessions still being characterised by thin liquidity.

The broad US dollar index (DXY) fell by 0.4% last Friday to currently trade around 108.95,but still close to a 2-year high. Several G10 currencies strengthened against the US dollar, including the EUR (+0.4%), JPY (+0.2), GBP (+0.3%), SEK (+0.4%), and CHF (+0.4%). However, the US dollar will also likely be supported by elevated US treasury yields, with the 2-year and 10-year yields staying above 4%. 

US ISM manufacturing PMI picked up to 49.3 in December, from 48.4 in November, on the back of an upside surprise in new orders. The new orders sub-index rose to 52.5, from 50.4 in November. However, overall factory activity in the US remained in contraction. The ISM manufacturing employment sub-index also fell to 45.3, following a brief pickup to 48.1 in November, reflecting a decline in headcount at a faster pace. This also suggests that manufacturers expect goods demand to decline in the coming months.

This week's spotlight shifts to US labour market releases, culminating in Friday's nonfarm payrolls report. Markets currently assign only around a 10% probability to a Fed rate cut at this month's FOMC meeting, making this week's data unlikely to alter expectations for a hold. However, uncertainty persists around the Fed's overall cutting cycle in 2025, particularly considering the potential impact of Trump's policies on the US economy. Also in focus will be the minutes of the Fed’s Dec17-18 meeting due on Wednesday.

EUR/USD climbed to trade around the 1.03 level, as the USD rally paused toward the end of last week. Traders now shift their attention to the EU Sentix data and Germany’s inflation report for fresh trading impetus. Euro Area growth concerns have mounted on the rise in energy prices but at this stage a lot is already priced in leaving an asymmetric sensitivity to good and bad news. 

GBP/USD holds positive ground around $1.2450 while EUR/GBP remains close to the 0.83 level

USD/JPY fell 0.3% to 157.62 despite data showing that the country’s services sector grew for the second consecutive month in December, driven by strong demand and ongoing business expansion.

AUD/USD edged marginally higher to $0.6230.

Meanwhile, emerging market currency index fell for the fifth straight week, impacted by the stronger US dollar and CNY weakness.  For now traders maintain their outlook for weaker Asian currencies leading up to Trump’s inauguration on 20 January, with “Trump trades” persisting in anticipation of US tariff hikes.  USD/SGD was largely unchanged trading around 1.3695, while USD/INR was marginally firmer up 0.1% trading around 85.828, the Indian rupee continues to test fresh record lows.

USD/KRW remains on the front foot at 1,467.89 amid the ongoing political crisis in the country.  Protestors took to the streets in South Korean capital Seoul calling for the arrest of impeached President Yoon Suk Yeol, after he attempted to impose military law in the country.

USD/CNY rose beyond 7.3000 level to 7.3648 (the highest level since early 2008) after authorities had defended that level for weeks. The PBOC has set the USD/CNY daily fixing rate at 7.1878 to contain the pace of currency depreciation. The upper bound of the USD/CNY trading band is now at 7.3316, which is only 0.14% above last Friday’s closing spot rate.

China’s services activity in December expanded at the quickest pace since May of last year with the Caixin PMI rebounding from 51.1 to 52.2. According to the Caixin press release, the acceleration in business activity growth was supported by greater new business inflows.