EUROPEAN FX UPDATE: USD shunned as Moody's downgrade spooks markets, GBP cheers UK-EU "reset" deal

USD: DXY -0.6%; 100.36

• USD is very much on the backfoot vs. peers after Moody's downgraded the US sovereign rating, warning of government debt and a widening budget deficit. These concerns have been heightened by news that the House Budget Committee approved President Trump's tax cut bill to set up a possible vote on the passage of the bill as soon as this week. Concerns over the final price tag of the bill has triggered a "sell US" theme at the start of the week. This week's US data docket is a light one aside from weekly claims and flash PMI metrics on Thursday. Fed speak is heavy today with Bostic, Williams, Jefferson, Logan & Kashkari all due on the docket. However, given the huge uncertainty surrounding the current outlook, rhetoric is unlikely to have much sway on pricing for a June cut which sits at just 8% (despite ongoing calls from President Trump for the Fed to lower rates). DXY has slipped below Friday's trough @ 100.52 and is now eyeing last week's low @ 100.27.

EUR: EUR/USD +0.8%; 1.1248

• EUR is firmer vs. the USD and at the top of the G10 leaderboard as traders seek a liquid alternative to the USD. Newsflow out of the Eurozone over the weekend has mainly centered on ECB speak with ECB’s Wunsch stating that the ECB may have to cut interest rates below 2% and noted that downside risks to growth and inflation have become bigger. Elsewhere, ECB’s Schnabel said the ECB should remain cautious on interest rate moves and that a steady hand is needed for now. This week's data highlight comes via flash PMI metrics on Thursday, with increases expected for the manufacturing, services and composite components. From a policy perspective, a June ECB cut is priced at around 92%. EUR/USD has ventured as high as 1.1250 but stopped shy of last week's peak @ 1.1265.

JPY: USD/JPY -0.5%; 144.91

• JPY has been a beneficiary of the softer USD and downbeat risk sentiment with USD/JPY back below the 145 mark. Newsflow out of Japan has been on the light side following reporting late last week that Japan is holding out for a better trade deal with the US, which would include a full removal of 25% tariffs. The FT speculates that a deal is not likely to be reached before elections due in late July, which would fall beyond the current 90-day tariff pause imposed by the US. The Japanese calendar this week sees the release of national CPI metrics on Friday, with April's Y/Y core CPI expected to rise to 3.4% from 3.2%. USD/JPY has delved as low as 144.67 with not much in the way of support until the 144 mark.

GBP: GBP/USD +0.6%; 1.3349

• GBP is one of the better performers across the majors with sentiment underpinned by news that the EU and UK have agreed an outline of a deal which will strengthen ties between both sides. As part of a post-Brexit reconciliation deal, they will sign a security and defence partnership as the centrepiece of a “reset”. Whilst closer relations with the EU will be seen as a positive for the UK, former special adviser to the PM, Raoul Ruparel, cautions that "it won't be a massive economic, political or diplomatic game changer". It is worth noting that there will be a limit as to how close the UK will be able to realign with the EU given the likely political backlash in doing so. Looking ahead for the week, the main highlight will come on Wednesday via the latest UK CPI metrics. As it stands, the next 25bps cut by the BoE is not priced until September. Cable has eclipsed last week's best @ 1.3360 with a session peak @ 1.3372. Next target comes via 1.34; not breached since 6th May (1.3402 was the peak that day).

Antipodeans: AUD/USD +0.4%; 0.6425. NZD/USD +0.1%; 0.5889

• Both firmer vs. the broadly weaker USD but to a lesser degree than most peers, alongside the subdued risk tone. Chinese data was mixed, in which Industrial Production topped forecasts, Retail Sales disappointed and House Prices continued to contract Y/Y. Attention now turns to tomorrow's RBA rate decision with the central bank widely-expected to deliver a 25bps rate cut. Desks will be looking to see if rhetoric from the Bank supports the median view by economists for the Cash Rate to be cut to 3.35% by year-end. AUD/USD is currently contained within Friday's 0.6387-0.6436 range and its 50 and 200DMAs @ 0.6333 and 0.6454 respectively. NZD/USD sits within Friday's 0.5865-0.5918 range and above its 200DMA @ 0.5883.

19 May 2025 - 09:55- ForexData- Source: Newsquawk