USD: JPY weakens on trade deal optimism - MUFG

The US Dollar (USD) weakened into the close of trading on Wednesday but has rebounded helped in part by optimism over the pace in which the US might be willing to reach deals with key trading partners. The comments made by Fed Chair Powell at the Economic Club in Chicago certainly indicated the difficulty central banks find themselves in in trying to manage upside inflation risks and downside growth risks. Our sense was that Powell clearly leaned in favour of focusing on inflation and ensuring price stability arguing that that was the basis for stronger economic growth, MUFG's FX analyst Derek Halpenny notes.

USD rebounds on trade talk optimism with Japan

"The lower UST bond yields weighed on the US dollar and it was the comments from Japan's Economic Revitalisation Minister Ryosei Akazawa that helped prompt the rebound of the dollar. President Trump had earlier posted on Truth Social that "Big Progress" had been made in initial trade talks with Japan and Akazawa echoed the optimism stating that the US wanted a deal within the 90-day tariff postponement period. He added that there was no discussions related to FX."

"The length of time of these meetings make it difficult for us to believe that anything of substance would have been agreed and for Japan this meeting was about 'building trust'. Nonetheless, another meeting is scheduled and the comments made have understandably lifted optimism. We perhaps should not be surprised. If there are countries that the US would be eager to reach deals with it would be the countries in Asia that have notable trading relations with China. We are also not surprised that FX was not raised as an issue."

"We expect the ECB to cut by 25bps today and the ECB should signal the scope to cut further given the downside growth risks will likely be viewed as greater than the upside inflation risks. The EUR EER-41 is 5.5% stronger than assumed in March forecasts that will add to downside inflation risks relative to those forecasts. Still, like Powell last night and BoC Governor Macklem, we shouldn't expect any strong conviction in policy guidance given the elevated uncertainty. That should limit post-press conference moves in EUR/USD and rates."