Instimatch - FX morning commentary - 6/2/25

Good morning

The USD index rose 0.1% in Asian trade to 107.71, with focus turning squarely to non-farm payrolls data due on Friday.  Yesterday’s ADP data showed private sector firms adding 183k jobs in January vs. an upward revised 176k in December, beating Bloomberg consensus of 150k. But the US ISM services index softened to 52.8 in January, from 54.0 in December, though still in expansionary territory.

In the US market participants will get more indicators to refine their read of the jobs market today with the Challenger job cuts data and the initial claims. Fed speakers include Jefferson, Waller and Logan.

EUR/USD has fully erased the tariff-induced losses earlier this week with the cross at 1.04. Out of the Eurozone we will get retail sales, and we will also watch the appearances of the ECB’s Nagel and Escriva.

GBP/USD has scaled back some of yesterday’s gains trading around $1.2480 ahead of today’s BoE meeting. The BoE is expected cut rates by another 25bp, bringing the Bank Rate down to 4.5%. Traders are already fully pricing in this week’s cut but going forward markets seem less certain. The currently priced in terminal rate of 3.75% still looks high but any repricing lower may take some time, however, since market concerns about inflation continue to linger. Traders though will be watching the vote split for any surprises. An 8-1 vote is seen as the most likely outcome, whereby the arch-hawk Catherine Mann would be in favour of holding the current rate. If she decides to support a cut, then that would be a strong dovish signal. Should, on the other hand, we have fewer votes in favour of a cut, and government spending is flagged as a dominant force in the growth picture, then expect a more hawkish reaction from markets.  Longer-dated gilts remain very much driven by US dynamics and the 10-Y yield of 4.4% actually trades at exactly the same level as 10-Y US Treasuries. 

In Japan, the faster pace of labour cash earnings should help keep BoJ on its rate normalisation path this year. This, along with a dip in US Treasury yields, will help support some modest yen strength.  The yen was buoyed by comments from BOJ board member Naoki Tamura overnight, who warned that steady growth in wages and inflation could see the bank hike rates to 1% in the second half of 2025. USD/JPY remains under pressure, but for now holding just around 152.65.

AUD/USD pair fell 0.2% to around $0.6265 as data showed a bigger-than-expected decline in Australia’s trade balance in December. The country’s exports to China could face renewed headwinds, especially as Beijing faces increased economic pressure from a trade war. 

China’s onshore market has reopened following the Lunar New Year Holiday, with the PBOC keeping its daily USD/CNY fixing rate below the 7.2000-level to contain the pace of yuan depreciation, while leaving room for potential bilateral negotiations with the US over a range of issues including trade, tech, and TikTok.

Meanwhile, USD/SGD could see further downside as the US dollar softens and trade tensions appear to have eased for now.

USD/INR pair hit a record high of 87.565 rupees, with the Indian rupee facing sustained pressure before a Reserve Bank of India meeting on Friday, where the central bank could potentially cut interest rates amid cooling economic growth. New RBI Governor Sanjay Malhotra is expected to pivot away from the central bank’s policy of using its foreign exchange reserves to stem rupee losses, presenting more weakness in the rupee.