timatch - FX morning commentary - 31/1/25

Good morning

The primary market driver remains developments within the Trump administration, particularly on tariffs. Trump has reiterated plans to impose new tariffs in the coming weeks, targeting Canada, Mexico, and China, with potential implementation as early as this weekend – citing the flow of fentanyl and large trade deficits among the reasons. With both Mexico and Canada pledging to retaliate to any trade levies it would notably raise the risk of tit-for-tat tariffs and weigh on global growth and trade. Additionally, he threatened that the BRICS bloc, which consists of Brazil, Russia, India, China, South Africa, and others, could face “100% tariffs” if they move away from the dollar. However, details remain scarce. In the near term, Trump's tariff policies suggest broad USD strength - but only if enacted.

The USD index was marginally higher in Asian trading hours at 108.20.  Traders now look ahead to the release of US Q4 Employment Cost Index (expected to pick-up from 0.8% to 0.9%) and Personal Consumption Expenditure (PCE) Price Index for December – the Fed's preferred inflation gauge – for fresh impetus.

EUR/USD seems to have consolidated around 1.0400 and yesterday's rather uneventful 25bp ECB cut had limited market impact. The pair was also largely unaffected by weaker-than-expected Q4 GDP growth in both the Eurozone, which stagnated in Q4, and the below-consensus 2.3%q/q growth rate in the US. Retail sales data from Germany this morning disappointed after unexpectedly declining by 1.6% in December vs. +0.2% which also weighs on Euro sentiment.

GBP/USD has edged back toward $1.2400, continuing its losing streak for the fourth consecutive session, trading around $1.2420. 

EUR/GBP has come under pressure with the pair declining from 0.845 to around 0.836.  GBP may be side-lined for now ahead of next week’s (Feb 7th) BoE meeting (including forecasts) though.

USD/JPY was largely unchanged at 154.70 despite a strong inflation print from Tokyo. Tokyo’s consumer price index (CPI) inflation rose as expected in January, reaching a nearly two-year high, driven by strong private spending. Headline CPI inflation accelerated to 3.4%y/y, up from 3% in December, marking its highest level since April 2023, while core CPI, which excludes fresh food prices, increased 2.5%y/y, hitting an 11-month high.  The BoJ is not expected to raise rates further until at least mid-2025.

AUD has been among the weakest performing G10 currencies this week. Australian Q4 inflation came out below expectations at 2.4%y/y and the trimmed-mean CPI (RBA's key measure for underlying inflation) grew 3.2%y/y (cons. 3.3%, Q3 3.5%). In Q/Q terms, underlying inflation is now close to pre-pandemic levels for the first time since 2021. Back in December, RBA verbally opened the door for its first rate cut in the upcoming February meeting, and after the favourable inflation reading, markets are now pricing up to 80% probability for the cut to materialise. Further evidence of cooling economy could add more near-term headwinds for the currency.

The Chinese yuan’s onshore pair USD/CNY inched 0.2% higher to 7.1857, while the offshore pair USD/CNH was steady.

Apart from India’s Budget, RBI this week has pushed through several INR liquidity injection measures totalling INR1.6trn to address the liquidity deficit in the banking system, and among other measures announced a US$5bn FX buy/sell swap. With these measures, onshore forward premia for USD/INR fell across the curve, but generally still remained above what’s implied by interest rate differentials for shorter tenors, indicating continued risk premia placed by markets on INR depreciation. Consensus forecast USD/INR at 86.80 in Q1 and 88.50 by Q4.

The Indonesian rupiah fell further, with the USD/IDR rising 0.4% to 16.320.20, even after the Bank Indonesia intervened to Thursday to assure the markets of stable supply and demand in forex markets