14th May 2025

The DOLLAR index has now filled the gap made at the Asian open early on Monday morning, with some selling reportedly deriving from headlines the US and South Korea discussed FX policy earlier this month. The fact that the US unit has not been able to keep hold of the gains made on the de-escalation in the trade war between the US and China feels telling. The scattergun and unreliable approach by the Trump administration to trade policy has eroded trust and continues to weigh on the US unit, despite expectations that the Fed will not be cutting rates until near the end of the year.

Usd/Jpy has reversed back down to 145.61, but still has some way to go to close its own gap from Monday morning, with 145.37 the target.

On the news front, Bbg reports US House Republicans could land on a compromise on the state and local tax deduction today, a deal that would represent a breakthrough in one of the thorniest policy debates in Trump’s economic package.

Also, the admin is said to be clearing a path for two key Persian Gulf allies to pursue their AI ambitions and some of the biggest US tech companies are seizing on that opening with plans to spend billions of dollars in the region.

We are almost halfway through the month of May now and the Aussie has been the clear winner from the de-escalation in the trade war between the US and China. The Australian unit is the best performing G10 currency so far this month, almost 0.5% clear of the next best, the Norwegian Krone.

AUD/USD reached 0.6487 at one stage in Asian trading, after yesterday's impressive rally from the 0.6360 area. The sharp reversal from the lows suggests that there is enough impetus to challenge last week's 2025 highs up at 0.6515. The Australian Wage Price Index came in faster than expected in Q1 at 0.9%, clearing expectations for a 0.8% print and accelerating from the 0.7% rate in Q4. While the data is unlikely to prevent a rate cut next week by the RBA, it certainly means that a cautious path on cuts is likely to follow.

China criticized the UK trade deal with the US, saying that security conditions in the pact target Beijing.

The Fed's Goolsbee stated that the temperate CPI print from April doesn't necessarily reflect the impact of rising US import tariffs and insisted that the FOMC is still in need of more data to understand the direction of prices and the economy.

Meanwhile the ECB's Nagel opined that although the Usd is very important for the world financial system, the role of the Euro will become stronger as a reserve currency over the next few years. On inflation, Nagel sees a "good probability" of prices converging towards the 2% price target.

In other central bank commentary, the Bank of England's Mann stated that the UK labor market has been more resilient than thought.

A quiet day lies ahead data wise, while we should hear from the Fed's Jefferson and after hours Daly. The ECB's Villeroy and Holzmann, also provide opinion.

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