Instimatch - FX morning commentary - 8/4/25

Good morning

We can expect another headline-driven market, especially since the data calendar is practically empty.  Traders though will be interested in the US NFIB Small Business Sentiment index data due later today given that the subcomponents and in particular the price plans data typically has quite a good leading relationship with US inflation and could provide some clues as to whether inflation pressures in the US are starting to build up. Wednesday will likely be the more eventful day with the US tariffs being enacted and the EU voting on a retaliatory package. Traders don’t expect much easing in sentiment unless Trump shows more willingness to negotiate.

The most severe concerns around spreading market volatility have eased somewhat, allowing long-end rates to move higher again. Markets do think the ECB will now very likely cut rates in April, as OIS forwards indicate an implied probability of close to 90%. But longer rates have moved higher again more noticeably with the 10y Bund yield rising from close to 2.4% back to above 2.6%. UK gilt yields saw similar swings, even slightly more at the very long end (30-y 28bp move). But uncertainly lingers, keeping risk appetite at bay and markets positioned for more central bank cuts.

US stock markets ended the day almost unchanged, with the S&P 500 ending down 0.2% turning round an initial drop of 5%.  However, sector performance was different, with yield sensitive sectors like real estate and utilities selling off while oversold cyclicals like banks and Mag 7 actually outperforming.  US futures are 1-2% higher this morning.  Asian markets saw some big moves overnight, with Nikkei 225 rising 5% on what seems like successful negotiations with Trump. Chinese equities mildly higher as well, despite the new tariff threats.

President Trump threatened to levy an additional 50% tariff rate on China starting 9 April and warned that all talks would be terminated if China does not withdraw its 34% retaliatory duties on US goods by today. This comes as China not only imposed 34% tariffs on all US imports late last week, but it also imposed a range of other measures such as export controls on medium and heavy rare earths, adding American firms to export control lists, while banning poultry and sorghum imports from some US firms. It remains to be seen how China will respond to Trump’s latest comments, but general indications including an article in the People’s Daily suggest that China has already prepared to ride out this storm, among other things saying that the economy is more diversified and with space for further policy responses to counter the negative impact of US tariffs. On that front, Bloomberg News reported that Chinese policymakers discussed measures to stabilise the economy in response to Trump’s tariffs, including accelerating plans to boost consumption. These measures could focus on boosting consumer spending, the birth rate, subsidies for some exports, together with details of a stabilisation fund to shore up its stock market. There were also some unconfirmed reports that Chinese sovereign fund Central Huijin is actively carrying out market stabilisation operations in the stock market.

The DXY index gained 0.5% throughout yesterday’s session back to around 103.00 on the back of safe haven flows, while haven currencies such as JPY were slightly weaker.

EUR/USD has enjoyed some early buying interest and could test 1.1100 – 1.1200 level.  Today features a string of ECB speakers, which could add some nuances on their thinking following the recent tightening of financial conditions. In the euro area, investor confidence declined in the first survey following Trump's tariff hammer. The Sentix investor confidence indicator released yesterday fell sharply from -2.9 to -19.5, marking its lowest level since October 2023. Conducted between 3 April and 5 April, this survey provides an early indication of what to expect from other sentiment indicators.

There is no UK data today, so GBP remains heavily shaped by overall market sentiment reflecting the currency’s growing responsiveness to risk factors.  GBP/USD fell 1.2% yesterday back below $1.2800 to open the European session around $1.2787, EUR/GBP jumped sharply to close around 0.8570.

Over the past week, there has been signs that China is gradually allowing some weakness, first by raising its USD/CNY fix to 7.1980 from 7.1793 before the reciprocal tariff announcement, and by also allowing USD/CNY to trade closer to the top end of its trading band.