Instimatch - FX morning commentary - 9/5/25

Good morning

Little data is scheduled, but plenty of central bankers will take the stage. From the Bank of England, we have both Governor Bailey and Pill speaking, which will be interesting just a day after the meeting. The ECB speakers include Simkus and Schnabel, while among the Fed speakers we have Williams, Barkin and Goolsbee.

President Trump has announced a trade framework with the UK, it seems the 10% base tariffs are mostly here to stay. Trump indicated that many countries will eventually get tariffs higher than 10% due to massive trade surpluses and unfair trade practices, in response to a question.

However, the US is showing some flexibility on sectoral tariffs, which could have important implications for how other countries including Japan, South Korea and India negotiate with the US. In particular, the agreement with the UK authorised a quota to import 100k UK cars per year at a lower rate of 10% (relative to the original 25%). In addition, it seems the UK could get a 0% tariff quota for steel and aluminium, but in exchange with cooperation with the US on a global trading agreement incorporating external barriers on these sectors. According to the UK, pharmaceuticals will also be given preferential tariffs in upcoming changes. While details are still lacking and some information conflicting between the two sides, the key implication is that Trump is willing to negotiate tariff rate quotas on the Section 232 sectoral tariffs.

Agriculture access seems like an important part of the deal, with Trump claiming improved market access for the US, although the UK emphasised that it would retain food safety standards. Purchase commitments are important, with both sides highlighting a US$10bn Boeing aircraft deal.

The NY Post meanwhile reported that the Trump administration is weighing a plan to reduce the 145% tariff on Chinese imports by more than half – effective as soon as next week – to between 50% and 54%. Meanwhile, trade taxes on neighbouring south Asian countries (presumably including Vietnam) will be cut to 25% according to the NY Post article. This would be consistent with expectations for Vietnam’s reciprocal tariff rate to be lowered from 46% to around 25%.

EUR/USD falling sharply towards the 1.12 level on rising market expectations of a China-US trade deal. Near-term the environment seems supportive of the trimming of USD short positions. However, the longer term the view remains that the last month's developments all hint at momentum having shifted for EUR/USD. Traders maintain a buy-on-dips strategy.

GBP found support during yesterday's session from a hawkish BoE and news of the trade agreement between the UK and the US. As expected, the BoE decided to cut the Bank Rate by 25bp to 4.25% yesterday. The vote split showed a surprisingly divided MPC with the statement tilting towards a hawkish bias.  For GBP FX, traders stay negative but highlight that an environment characterised by less uncertainty and positive risk-sentiment acts as a positive for the currency.

The dollar index steadied in Asian trade to around 100.63 after clocking strong gains in the past two sessions. The index is trading up about 0.7% for the week, the third straight week of gains. 

USD/JPY fell 0.1% to around 145.46 overnight, but the pair remain near a one-month high following softer-than-expected overall wage income data, which went against the BoJ’s narrative of higher wages and sticky inflation. Real labour earnings for March declined 2.1% y/y, while household spending overshot expectations significantly at 2.1% y/y and 0.4% m/m (cons: 0.2% y/y, -0.5% m/m).

USD/CNY rose 0.2% to 7.2942, but the yuan took little support from data showing a bigger-than-expected increase in Chinese exports, despite headwinds from steep U.S. trade tariffs against Beijing. China’s imports also fell much less than expected, while its trade balance just missed expectations in April. 

China’s Vice Minister of Foreign Affairs Chunying Hua said on Friday that the U.S. tariffs were unsustainable and that Beijing was prepared for any outcome from the trade talks. 

USD/INR pair rose 0.2% to 85.699. The rupee remains fragile as India and Pakistan rapidly escalate military action against each other. Two Indian fighter jets are reported to have been shot down, artillery bombing in the Indian Kashmir region and drone attacks along India's west boarder which Pakistan has denied.

Markets have unwound some of their excessive optimism towards the Malaysian ringgit (MYR). And there could still be further retracement ahead due to macro headwinds.