Instimatch - FX morning commentary - 8/5/25

Good morning

The Bank of England is widely expected to cut rates by 25bp to 4.25% in line with consensus and market pricing. Inflation has surprised to the downside over the past months and combined with elevated uncertainty and downside risks to growth from the trade war, the MPC is expected to still deliver a slightly dovish twist. Beyond that there is little data on the European side apart from German industrial production data and trade balance in the morning. In the US the data highlights are weekly jobless claims figures which are seen slightly lower as well as the NY Fed’s 1y inflation expectations survey in light of the tariffs.

The Fed left monetary policy unchanged with the Fed funds target rate range remaining at 4.25-4.50%. It was a unanimous decision with the accompanying press release stating that the economy continues to "expand at a solid pace", labour market conditions remain "solid" while inflation "remains somewhat elevated". All this phraseology is the same as last time.

The key modifications are that the Fed believes the "uncertainty about the economic outlook has increased further” and that the “risks of higher unemployment and higher inflation have risen". The somewhat hawkish tone by the Fed has supported a modest rebound in the greenback, but it has not changed the pre-FOMC market expectation of 3 US rate cuts this year. 

President Trump and Treasury Secretary Bessent will likely keep pressuring the Fed to cut interest rates, but those demands will continue to fall on deaf ears as officials try to gauge the inflationary impact from the Administration’s trade policies amidst ongoing labour market strength. Higher tariffs look set to lift prices while port operators and logistics firms are warning of a potential supply crunch that risks amplifying the near-term inflation threat. As such the Fed is in 'wait and see' mode, with Chair Jay Powell warning last month that “our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem”. This was repeated at yesterday's press conference.

The dollar index fell marginally in Asian trade to 99.88 after posting some gains post the Fed decision. Trump said that he will announce a major trade deal later today, after a report said the deal will be with the UK. The UK is not subject to Trump’s plans for steep reciprocal tariffs, given that it has a trade deficit with Washington. It’s the first such announcement which should start negotiations on tariff rates, non-tariff barriers, digital trade… in coming months.

EUR/USD is holding steady above 1.1300 on the back of modest USD selling. GBP/USD opens the European session trading firmer around $1.3320 with EUR/GBP dipping below the 0.85-handle.

USD/JPY fell 0.2% to around 143.90, as the yen recovered some of its recent losses. Japanese wage data is due on Friday and is widely expected to factor into the outlook for Japan’s interest rates. 

The Chinese yuan weakened slightly overnight with USD/CNY pair rising 0.1% to 7.2381. The currency had taken limited support from Washington and Beijing confirming that officials will meet for trade talks in Switzerland this week.

Elsewhere, the recent sharp pace of appreciation in the Taiwan dollar has stalled at around the 30.00-level against the US dollar. But the 1-month volatility remains at a historic high. Headline inflation eased to 2%y/y in April from 2.3% in March, but this may not be enough for a policy pivot by Taiwan’s central bank. CBC governor Yang Chin-long has said that policy easing would most likely come only when inflation moderates below 1.5%y/y.

USD/INR pair fell 0.2% to around 84.760 after rising sharply in the prior session on heightened tensions with Pakistan. India struck several alleged terrorist sites in Pakistan, drawing retaliatory shelling from Islamabad in the Kashmir border region.