EUROPEAN FX UPDATE: USD stronger vs. peers as US-China meeting spurs trade hopes

USD: DXY +0.2%; 99.41

• DXY is attempting to claw back some of yesterday's losses that were seen alongside a pullback in US yields. Recent optimism has been spurred by news that US and China trade talks are to take place in Switzerland from May 9th-12th. However, desks remain sceptical about how much progress can be made given how deeply entrenched both sides are and therefore expectations of a potential full-ranging trade deal may need to be tempered. For today's US agenda, Treasury Secretary Bessent is due to testify before the House. From an FX perspective, ING notes that one potential interesting line of inquiry would be whether or not there will be a currency element to any upcoming trade deals. Thereafter, all eyes will be on the FOMC whereby 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. DXY is currently sat within yesterday's 99.17-100.09 range.

EUR: EUR/USD U/C; 1.1364

• EUR flat vs. the USD after a session of gains yesterday which saw the pair advance from an opening level of 1.1314 to a peak @ 1.1381 alongside a softening in US yields. From a domestic perspective, CDU Leader Merz was elected Chancellor in the second-round parliamentary vote. However, the failure in the first round could foreshadow problems for the Government with ING noting that the difficult start foreshadows hurdles around quickly pushing through the necessary investments and reforms. Markets await any developments on the trade front for the EU, albeit, the bloc doesn't appear to be particularly high up on the US' negotiating list with US and Chinese trade representatives set to meet in Geneva this weekend.

JPY: USD/JPY +0.6%; 143.29

• JPY the laggard across the majors with USD/JPY back above the 143 mark. The domestic story for Japan is a quiet one as market participants returned from the four-day weekend. As such, direction for the pair has been dictated by the US trade agenda. Given the JPY's appreciation when trade tensions heightened in April, a potential breakthrough between the US and China (see USD section for details), should provide some reprieve for USD/JPY. USD/JPY has ventured as high as 143.35 but is still some way off yesterday's best @ 144.27.

GBP: GBP/USD -0.2%; 1.3335

• GBP is a touch softer vs. the USD and EUR, giving back some of yesterday's gains which were triggered by a Reuters report that the EU and UK have agreed to hold annual summits to discuss their relationship. Shortly after, the UK reached a free trade agreement with India, with India set to cut tariffs on 90% of UK imports. Thereafter, reports suggested that the UK is closing in on US trade pact with lower tariff quotas for cars and steel. The totality of the potential deals underpinned Cable sending the pair to a 1.3402 peak before returning to a 1.33 handle; currently oscillating around the 1.3350 mark. Attention now turns to Thursday's BoE meeting, which is expected to see policymakers deliver a 25bps rate cut; focus will be on any potential tweaks to guidance.

Antipodeans: AUD/USD -0.3%; 0.6474. NZD/USD -0.2%; 0.5995

• Both softer vs. the USD and unable to benefit from the PBoC's decision to cut the RRR by 50bps, the 7-day reverse repo rate by 10bps and other easing measures (see analysis piece for details). From a domestic perspective, NZ published mixed Employment data and a softer-than-expected Labour Cost Index but had little follow-through into NZD. NZD/USD briefly made its way onto a 0.60 handle for the first time since 22nd April (session high @ 0.6023) before pulling back. AUD/USD hit a fresh YTD high overnight @ 0.6514 before returning to a 0.64 handle; is still holding above its 200DMA @ 0.6459.

07 May 2025 - 10:15- ForexEU Research- Source: Newsquawk