EUROPEAN FX UPDATE: USD down again, JPY leads the majors, EUR contemplates Merz failure

USD: DXY -0.2%; 99.58

• After an attempted recovery last week, the USD has continued to ebb lower after DXY failed to sustain a move above the 100 mark, despite a solid showing for US ISM services. Fed pricing moved a little more hawkishly with a full 25bps cut not seen until September (vs. July pre-release). Greater clarity on the Fed front will come tomorrow via the latest FOMC policy announcement. Expectations are for the Bank to stand pat on rates with Fed Chair Powell continuing to note that the Fed is well-positioned to wait for greater clarity before considering altering its policy stance. ING does not expect the Fed to have major implications for the USD with the recent recovery of US assets instead having provided greater traction for the dollar. The desk adds that the "new USD downside risks stemming from Asia shouldn’t be downplayed". On which, the HKMA says it has been lowering its duration in US treasury holdings and has been diversifying into non-US assets. DXY is currently towards the lower end of yesterday's 99.46-100.05 range.

EUR: EUR/USD +0.2%; 1.1336

• EUR is firmer vs. the broadly weaker USD as Eurozone-specific newsflow remains on the light side. ECB-dove Stournaras noted he does not see inflation if the EU tariff reaction is selective and it seems the ECB will continue with rate cuts. As it stands, the terminal Deposit rate is seen just above the 1.5% mark vs. the current level of 2.25%. Nothing of note has happened on the trade front after the EU made the US a EUR 50bln trade offer last week. EUR/USD has gained a firmer footing on a 1.13 handle but is yet to approach yesterday's high @ 1.1364 with some of the upward momentum for the currency stalled in recent trade after Germany's CDU leader Merz fell short of a majority needed to become Chancellor in the first round of voting in parliament.

JPY: USD/JPY -0.5%; 142.99

• USD/JPY traded indecisively overnight and failed to sustain a brief return to the 144.00 level with price action largely driven by the dollar amid the continued absence of Japanese participants. In European trade, downside was seen for the pair as global equity futures ebbed lower. On the trade front, there is little of note to update beyond yesterday's report in Japanese press that the US has rejected a full exemption for Japan from reciprocal tariffs but would consider "only a cut in the 14 percent country-specific tariff". USD/JPY has delved as low as 142.91 with the next target coming via the 1st May low @ 142.88.

GBP: GBP/USD +0.2%; 1.3322

• GBP mildly firmer vs. the USD as UK participants return to market. UK newsflow remains light with markets looking ahead to Thursday's BoE policy announcement. Expectations are for the BoE to deliver a 25bps rate cut. The decision to cut rates is expected to be unanimous, however, some policymakers such as external member Dhingra may opt to back a larger 50bps move. Market participants will also be looking for how the MPC positions itself for rate cuts going forward with attention on whether it tweaks its "gradual and careful" language or “restrictive” view on the Base Rate. Within the accompanying MPR, ING expects a reduction in the 2025 inflation forecast and an upgrade to the 2025 growth projection but sees no major changes to the medium-term outlook. Cable has ventured as high as 1.3333 but is yet to test yesterday's 1.3336 peak.

Antipodeans: AUD/USD -0.1%; 0.6457. NZD/USD +0.4%; 0.5988

• Diverging fortunes for the antipodeans with AUD towards the bottom-end of the G10 leaderboard. Overnight trade saw a larger-than-expected contraction in Australian building approvals and a disappointing Chinese services PMI. However, the cause for underperformance vs. NZD is otherwise unclear. AUD/USD is currently straddling its 200DMA @ 0.6459 and tucked within yesterday's 0.6434-93 range. NZD/USD is eyeing a test of yesterday's peak @ 0.5996. If breached, focus will be on a test of 0.60.

06 May 2025 - 10:00- ForexEU Research- Source: Newsquawk