Instimatch - FX morning commentary - 7/5/25

Good morning

Today's focus will turn to the FOMC meeting this evening where the central bank is widely expected to leave rates on hold at 4.5%. Consensus expects little change to the USD upon announcement/the press conference although the balance of risk is probably skewed towards a slight dovish surprise and hence a weaker greenback. Policymakers could reiterate that uncertainty around the economic outlook has increased, while maintaining a wait-and-see approach. Recent surveys suggest the US services activity is still holding up, but inflationary pressures are building. This may keep the Fed cautious about delivering a dovish signal. 

The 10Y US Treasury auction went well yesterday as there was strong demand at the auction as US Treasury sold $42bn of 10-Y Treasury bonds with a yield of 4.34% relative to a yield of 4.43% at the previous auction. The bid-to-cover was 2.6 relative to 2.67 at the previous auction. 10Y US yield rallied a few basis points after the auction. Today we have the 30-Y auction and the market will be looking for a similar demand at the auction.

The dollar index rose 0.3% in Asian trade to 99.45. Safe haven flows also aided the greenback, albeit slightly. There was more positive news over US/China trade talks. U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet their Chinese counterparts in the coming days. China’s Vice Premier He Lifeng, Beijing’s lead official in U.S.-China trade matters, will meet the two in Switzerland, although the road ahead is likely to be a bumpy one. 

EUR/USD has strengthened to 1.1360 despite the slight German policy scare on Merz not winning the first chancellor vote.

GBP/USD is posting small losses near 1.3350 in early Europe session, eroding a part of its weekly gains.

Analysts are split between 25 and 50bp worth of cuts from the polish central bank (NBP) today, with a slight tilt in consensus towards 50bp, which would take the base rate to 5.25%. A 50bp would likely see EUR/PLN push slightly higher towards the 4.30 mark. The Czech Republic, CNB is also due for a policy announcement. Following an unchanged decision at the last meeting (March), consensus is now favouring another 25bp cut, which would take the repo rate to 3.5%. 

Most Asian currencies weakened on Wednesday as a military escalation between India and Pakistan weighed further on risk sentiment. USD/INR pair rose 0.3% to around 84.5 rupees, after India said it had carried out strikes against several alleged terrorist targets in Pakistan. Pakistan decried the attack and claimed it had retaliated with artillery strikes and by shooting down at least three Indian planes. 

New Delhi said the strikes were in retaliation for a deadly terrorist attack in Indian Kashmir in April.

The Chinese yuan weakened overnight, with USD/CNY rising 0.1% to 7.2263, while USD/CNH rose nearly 0.2% to 7.2219. The PBoC announced it will cut its benchmark repurchase rate by 10bp to 1.40%, while its reserve requirement ratio will fall by 50bp to 6.2%. 

USD/KRW strengthened by around 1.6% to 1,394.89 in catch-up trade, while USD/SGD rose 0.4% to 1.2908. The Taiwan dollar- which has been a standout performer among Asian currencies in recent sessions- weakened overnight, with USD/TWD easing nearly 1% to 30.221. Monetary authorities in Hong Kong have been forced to step in the FX market to protect the currency peg. The HK dollar rose to the strong end of the USD/HKD 7.75-7.85 trading band, prompting already four USD sale operations since Friday which triggered the biggest short-term interest rate drop since 2008.