EUROPEAN FX UPDATE: USD pressured as trade tensions continue to ratchet higher

USD: DXY -0.4%; 102.41

• USD is softer across the board as reciprocal tariffs alongside the 104% levy on China came into effect. In response, China's Foreign Ministry defended the nation's right to development and vowed to continue to take resolute and effective measures to safeguard legitimate interests. Given the level of imports from China into the US, the potential inflationary impact on the US has not been lost on markets. Reuters sources reported that the PBoC has asked major state banks to reduce USD purchases. In terms of where we go from here, markets are bracing for any further escalation of tensions or whether the US can begin making deals with some of the nation's who have reportedly reached out to the US; keep an eye on Japan and South Korea. On the domestic agenda, FOMC minutes are due for release later. However, these will likely be deemed as stale given the fluidity of the trade war. FOMC pricing fully factors in a 25bps cut in June with a total of 103bps of easing seen by year-end. DXY ventures as low as 101.91 but failed to test the YTD trough @ 101.26; has since stablised above the 102 mark.

EUR: EUR/USD +0.6%; 1.1025

• EUR remains underpinned vs. the USD with ING noting "The euro remains in a good position to benefit from any USD confidence crisis, being the second most liquid currency in the world and a preferred alternative to the dollar for FX reserves". ECB speak today has seen non-committal remarks from Spain's Escriva, who noted that for now, he will not talk about recession and the ECB will need to evaluate the new scenario regarding the impact of US tariffs on inflation. Elsewhere, known-hawk Knot of the Netherlands remarked that the impact of the trade war is likely inflationary in the long term, adding that rates are at the upper end of the neutral range. Reuters sources have reported that the ECB says EZ growth is to take a bigger hit from US President Trump tariffs than earlier estimated; initial ECB estimate of 50bps hit to growth in first year under revision, could be as much as 100bps. As it stands, markets price 26bps of cuts for next week's meeting and a total of 82bps by year-end. EUR/USD has ventured as high as 1.1089 but stopped shy of the April 3rd YTD peak @ 1.1145.


• EUR/USD opex: 1.0900 (1.9bln), 1.0925 (613mln), 1.0950-60 (1.3bln), 1.0975-80 (1.1bln), 1.1000 (1.2bln), 1.1015-25 (1.3bln), 1.1050-60 (1.5bln), 1.1100 (472mln).

JPY: USD/JPY -0.7%; 145.28

• JPY firmer vs. the broadly softer USD and underpinned by its safe haven status. There have been several updates out of Japan with overnight remarks from BoJ Governor Ueda who reiterated that the central bank remains open to further rate hikes if Japan’s economic recovery continues as projected. Thereafter, Japan's top currency Diplomat Mimumra stated that three-party talks were held in response to US tariffs, discussed unstable moves in financial markets and agreed to do the utmost to maintain stability in global markets. He added that officials are watching moves with a high sense of urgency, but avoided commenting on daily FX moves. More recently, Japanese press reported that the government and ruling coalition could distribute cash handouts as part of measures to cushion the blow from Trump tariffs. BoJ tightening bets continue to unwind with just 1.68bps of hikes priced by year-end. USD/JPY has delved as low as 144.56 but stopped shy of the April 4th YTD low @ 144.54.


• USD/JPY opex: 143.55 (1.4bln), 144.00 (500mln), 145.00 (776mln), 145.70 (350mln), 146.00 (675mln), 146.50 (565mln), 146.70-80 (1.5bln), 147.00 (716mln), 147.50 (1.3bln).

GBP: GBP/USD +0.5%; 1.2824

• GBP firmer vs. USD but to a lesser extent than peers. UK newsflow remains less prominent than elsewhere. However, UK Chancellor Reeves is to hold tariff crisis talks with top city executives, according to Sky News. Furthermore, UK Culture Secretary Nandy said they will rule out changes to the Online Safety Act as part of US trade talks; something which the US had been pushing for. Note, UK PM Starmer is due to make remarks at 11:00BST. Of concern for the UK is the gravitational pull of global bond yields with the UK 30yr yield hitting its highest level since 1998. MPC members remain non-committal on their view of the fallout from the trade war with BoE Deputy Governor Lombardelli stating that the CPI impact of tariffs will depend on other countries' actions and can't take a position on this now. Cable is currently stuck between its 50 and 200DMAs @ 1.2743 and 1.2812 respectively.

Antipodeans: AUD/USD +0.9%; 0.6011. NZD/USD +0.4%; 0.5552

• Both firmer vs. the USD but less to for NZD following the RBNZ rate decision which saw the central bank cut the OCR by 25bps to 3.50% (as unanimously forecast) and signalled further cuts ahead. Following the decision, Capital Economics wrote "we’re sticking to our forecast for a terminal rate of 2.5%, which is well below the 3% trough that the analyst consensus is predicting". Overnight, NZD/USD hit a fresh YTD low @ 0.5487 before recovering and moving back onto a 0.55 handle. AUD/USD is higher following recent Chinese stabilisation measures and expected policy support. Albeit, as a note of caution, China appears to remain resolute in pushing back against the US' trade practices. AUD/USD hit another multi-year low overnight @ 0.5915 before reclaiming its footing on a 0.60 handle.

09 Apr 2025 - 10:15- ForexEU Research- Source: Newsquawk