EUROPEAN FX UPDATE: USD trims some of yesterday's gains, EUR/USD returns to a 1.14 handle

USD: DXY -0.2%; 99.04

• DXY fractionally lower following yesterday's session of gains which were in part a bounceback from Monday's losses and supported by JOLTS data. On the trade front, markets await the call between Trump and Xi on Friday. Ahead of which, Trump posted that his Chinese counterpart is "very tough, and extremely hard to make a deal with". That being said, markets appear to be biased towards a positive outcome for the call or at least for Trump to put a positive spin on it. Note, there is a risk that Trump takes a tougher stance on China in order to push back on the "TACO trade". In the interim, attention will be on the data slate with ADP due on deck ahead of Friday's all-important NFP print. Elsewhere, ISM services and the Fed's Beige Book are also scheduled for today. DXY ventured as high as 99.39 overnight before pulling back to levels closer to 99.

EUR: EUR/USD +0.3%; 1.1403

• EUR is a touch firmer vs. the USD and back on a 1.14 handle following a soft EZ inflation release in the run-up to tomorrow's ECB policy announcement. Tomorrow is nailed on for the Bank to deliver a 25bps cut in the Deposit Rate to 2.0%. As such, focus will be on any clues as to what comes thereafter, given the apparent split of views on the GC. The account of the ECB meeting (albeit when trade tensions were higher) showed that some members would have been comfortable with a 50bps reduction. Some of the more hawkish members on the GC may opt to dissent to the decision with Holzmann of the view that the ECB should not cut rates in June or July. Currently, markets see a total of 55bps of loosening by year-end (including the expected June cut). Elsewhere, an upward revision to the EZ composite PMI into positive territory had little follow-through into EUR.

JPY: USD/JPY U/C; 143.86

• JPY slightly firmer vs. the USD but holding onto most of the prior day's spoils, which were spurred by a firmer buck and the positive risk tone. Incremental newsflow out of Japan has been on the light side, aside from Japanese Chief Cabinet Secretary Hayashi stating they have not received any letter from the US asking to make the best offers on trade talks. On a domestic footing, Japan's ruling coalition partner is to propose lowering the consumption tax rate for food and offer household cash payouts to offset the impact from increasing living costs. USD/JPY had ventured as high as 144.38 overnight before drifting back towards the top end of yesterday's 142.37-144.11 range.

GBP: GBP/USD +0.2%; 1.3541

• GBP firmer vs. the USD and flat vs. the EUR with pertinent UK-specific newsflow lacking aside from the White House announcing that US tariffs on UK steel and aluminium will remain at 25% for now, with the UK failing to get the 0% tariffs promised in the US ‘deal’ implemented in time, according to Bloomberg. Elsewhere, an upward revision to UK services PMI had little impact on the GBP. Note, "survey respondents mostly cited cutbacks to discretionary business and consumer spending". Cable is currently tucked within yesterday's 1.3492-1.3559 range.

Antipodeans: AUD/USD +0.2%; 0.6473. NZD/USD +0.2%; 0.6011

• Both a touch firmer vs. the slightly softer USD with AUD able to overlook disappointing Australian GDP data, which has heightened calls for a looser approach by the RBA. Both currencies will be eyeing the outcome of the Trump-Xi call on Friday, given that China is both of their largest trading partners. AUD/USD is currently towards the middle of yesterday's 0.6447-0.6499 range. NZD/USD has moved back onto a 0.60 handle but is still some way off yesterday's best @ 0.6054.

CAD: USD/CAD U/C; 1.3714

• CAD flat vs. the USD ahead of today's BoC policy announcement. The BoC is expected to keep rates on hold at 2.75%, although some (6/26 surveyed by Reuters) expect a 25bps rate cut; markets price such an outcome at 30%. Ahead of the release, ING writes "We think this meeting is a coin toss. We are very marginally favouring a cut purely based on the economic justification, but admit that the BoC might send an excessively dovish signal by cutting when markets are pricing in only 5bp". In the event the BoC holds, language may have a dovish skew. As it stands, 42bps of loosening is seen by year-end. ING highlights CAD's "asymmetrical correlation with US economic woes compared to other G10 currencies". USD/CAD is currently tucked within yesterday's 1.3701-43 range. If breached to the downside, Monday's YTD trough sits @ 1.3674.

04 Jun 2025 - 10:15- ForexData- Source: Newsquawk