EUROPEAN FX UPDATE: USD gives back some of yesterday's gains. Focus turns to FOMC and potential 2025 FFR dot adjustment

USD: DXY -0.1%; 98.68

• DXY has given back some of yesterday's geopolitically-induced gains. As opined by ING, the USD is slowly regaining some of its function as a safe-haven with the dollar also underpinned by the recent upside in crude prices. It remains unclear at this juncture how much further impact geopolitics will have on the USD. A material escalation would naturally trigger further risk-aversion and could provide the greenback with some reprieve. However, the impact on the crude channel is less clear given OPEC's willingness to increase supply and the ongoing negative growth impulse from Trump's tariff actions. From a macro perspective, attention today is on the FOMC policy announcement, which is ultimately set to be a placeholder meeting with officials set to stand pat on policy given the highly uncertain economic outlook. There is a chance that the 2025 FFR dot may be tweaked to show just 25bps of loosening this year vs. the prior forecast of 50bps (it would only take two forecasters adjusting their call to shift the median view). However, desks are sceptical whether this would be enough to prompt a durable pick-up in the USD given the uncertainty surrounding such forecasts and the ongoing broader USD downtrend. Note, weekly claims metrics are due today on account of tomorrow's US market holiday. DXY has delved as low as 98.50, comfortably above yesterday's trough @ 98.02.

EUR: EUR/USD +0.2%; 1.1501

• Incremental macro drivers for the Eurozone remain on the light side. Yesterday's better-than-expected outturn for German ZEW - adding to the recent run of encouraging Eurozone data - failed to have a durable impact on the EUR, with the pair dictated more by price action in the broader USD. Given ongoing geopolitics and the FOMC policy announcement today, the dollar is likely to continue providing the greater source of direction for the pair. Desks continue to highlight the importance of recent developments in the crude market, which could muddy the water of the ECB's inflation outlook. As a reminder, the ECB's 2026 inflation forecast of 1.6% was predicated on lower energy prices and a firm EUR. However, uncertainty is currently too high to see a reappraisal of the ECB's policy outlook at this juncture. EUR/USD briefly matched yesterday's low @ 1.1474 but has since reclaimed its footing on a 1.15 handle.

JPY: USD/JPY -0.1%; 145.08

• JPY is firmer vs. the USD but to a lesser degree than peers on account of the recent upside in energy prices (Japan is a notable net importer of crude) and a lack of progress on the trade front. These effects appear to have limited JPY's role as a safe-haven yesterday. The latest reporting suggests that the two sides remain unable to broker a deal, however, Japanese PM Ishiba agreed with US President Trump to continue ministerial-level tariff talks. Additionally, trade metrics overnight showed the first decline in Japanese exports in eight months as the impact of Trump's tariffs acted as a drag on domestic auto producers. USD/JPY briefly eclipsed yesterday's high @ 145.38, topping out @ 145.44 before returning to levels closer to 145.

GBP: GBP/USD +0.2%; 1.3448

• GBP firmer vs. the broadly weaker USD and flat vs. the EUR. Little sustained follow-through has been seen following the latest UK inflation metrics, which saw Y/Y CPI match the Refinitiv consensus and MPC projection @ 3.4%, whilst core Y/Y printed at 3.5% as expected and services Y/Y come in a touch below forecast at 4.7% vs. Exp. 4.8% (MPC forecast 4.7%). The reaction was muted given that the release will have little follow-through into tomorrow's BoE policy announcement, with the MPC widely expected to keep policy steady with dovish dissent from Dhingra and Taylor. Last week's soft labour market and growth metrics have prompted concerns over the BoE potentially falling behind the curve. However, the MPC is unlikely to ditch its “gradual and careful” approach to policymaking with inflation set to rise in the coming months. GBP/USD is currently towards the bottom end of yesterday's 1.3415-1.3592 range.

Antipodeans: AUD/USD +0.3%; 0.6492. NZD/USD +0.2%; 0.6022

• Both are attempting to claw back some of yesterday's risk-induced losses as high-beta FX tracks the recovery in sentiment after geopolitical updates quietened down overnight and the US has (for now) refrained from joining Israel's attack on Iran. From a macro perspective, focus this week will be on NZ Q1 GDP metrics on Wednesday and Australian labour market data on Thursday. AUD/USD is currently lingering just below the 0.65 mark and trades within a 0.6469-0.6513 range. NZD/USD is holding above the 0.60 mark within a 0.6010-39 range.

SEK: EUR/SEK +0.5%; 11.0121

• SEK is net weaker vs. the EUR following the Riksbank's decision to cut rates by 25bps and provide a rate path forecast which "entails some probability of another rate cut in 2025". Furthermore, the accompanying economic assessment noted that "the economic recovery that began last year has lost momentum, and inflation is expected to be somewhat lower than in the previous forecast". That being said, such forecasts are shrouded in "considerable uncertainty" given trade developments and recent geopolitical tensions. EUR/SEK has moved onto an 11 handle and at its highest level since 2nd May with a current session peak @ 11.0158.

18 Jun 2025 - 09:55- ForexGeopolitical- Source: Newsquawk