Forex News

• US S&P Global Manufacturing PMI rose to 52.4 in March.
• US Dollar Index stays in positive territory near 99.50.

The business activity in the US private sector continued to expand at a moderate pace in March, with S&P Global Composite Purchasing Managers' Index (PMI) coming in at 51.4 (preliminary), down slightly from 51.9 in February.

In this period, the Manufacturing PMI improved to 52.4 from 51.6, while the Services PMI declined to 51.5 from 51.7.

Assessing the survey's findings, "the flash PMI survey data for March signal an unwelcome combination of slower growth and rising inflation following the outbreak of war in the Middle East," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

"The Fed will therefore need juggle these intensifying upside risks to inflation against the growing risk of the economy losing growth momentum, with much depending on the duration of the war and its impact on energy prices and global supply chains," Williamson added.

Market reaction

The US Dollar Index preserves its recovery momentum following the PMI data and was last seen rising 0.3% on the day at 99.45.

• GBP/JPY edges lower as weak UK PMI data pressures the Pound.
• UK business activity slows sharply, with Composite PMI hitting a six-month low.
• Japan inflation eases, but underlying price pressures remain firm, supporting the Yen.

GBP/JPY trades in a narrow range on Tuesday with a mild downside bias, as the British Pound (GBP) weakens following weaker-than-expected UK business activity data. At the time of writing, the cross is trading near 212.50, reversing earlier gains driven by Japan’s softer inflation data.

The latest UK S&P Global preliminary Purchasing Managers Index (PMI) data showed a notable slowdown in economic activity in March. The Composite PMI fell to 51.0 from 53.7, missing expectations of 52.8 and marking a six-month low.

The Services PMI dropped sharply to 51.2 from 53.9, well below the 53.0 forecast. The Manufacturing PMI edged down to 51.4 from 51.7, but slightly beat expectations of 51.1.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, “The war in the Middle East has hit the UK economy in March, stalling growth while driving inflation sharply higher.” Williamsom added, “The full impact on inflation and economic growth depends not just on the duration of the war but also the length of disruptions to energy markets and shipping, though March’s PMI numbers clearly underscore how downside growth risks and upside inflation risks have already materialised.”

The Bank of England (BoE) kept interest rates unchanged at 3.75% last week, with policymakers warning that the Middle East conflict is likely to push inflation higher through rising energy costs. The latest PMI figures add to this challenge, suggesting the BoE is likely to remain on hold for longer, with traders now fully pricing in two rate hikes by year-end, a sharp shift from earlier expectations of policy easing.

On the Japanese side, the Yen finds some support despite softer headline inflation data. Japan’s National Consumer Price Index (CPI) rose 1.3% YoY in February, easing from 1.5% previously, while core inflation excluding fresh food slowed to 1.6% from 2.0%, slipping below the Bank of Japan’s (BoJ) 2% target.

The data could complicate the Bank of Japan’s (BoJ) normalization path after the central bank kept its policy rate unchanged at 0.75% last week. Policymakers reiterated that they will continue to raise rates if the economy and prices evolve in line with forecasts, adding that policy will be guided by the goal of achieving the 2% inflation target stably and sustainably.

Attention now turns to the BoJ's monetary policy meeting minutes and the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) data due on Wednesday.

DBS Group Research economist Ma Tieying assesses South Korea’s markets after President Yoon nominated Shin Hyun-song as the next Bank of Korea (BoK) governor. She argues Shin’s focus on financial stability does not translate into imminent tightening, seeing rate hikes as unlikely. DBS expects South Korean Won (KRW) rates to reprice lower and highlights persistent sensitivity of the KRW and equities to global risk sentiment.

BoK nomination, KRW rates and assets

"South Korea’s president announced on March 22 the nomination of Shin Hyun-song—head of the Monetary and Economic Department at the Bank for International Settlements—as the next governor of the Bank of Korea, succeeding Rhee Chang-yong when his term ends on April 20. Shin is generally perceived as more hawkish than dovish, reflecting his long-standing focus on financial stability and leverage risks. However, amid elevated geopolitical uncertainty and ongoing oil price volatility, we expect his leadership to lean toward a balanced and pragmatic policy approach rather than outright tightening bias."

"KRW rates markets appear to have overpriced tightening risks. OIS/swap markets are currently pricing a 25bp hike (to 2.75%) within six months and around 100bp of cumulative hikes (to 3.50%) within 12 months—an outlook that appears overly aggressive relative to the macro backdrop and Shin’s policy framework."

"This creates scope for a downward repricing in front-end KRW rates and KTB yields, particularly after the May policy meeting when the BoK will release updated macro forecasts alongside its rate projection “dot plot”. South Korean assets remain highly sensitive to global risk sentiment."

"The KRW has weakened by around 5% month-to-date, breaching 1,500 against the USD, while the KOSPI has declined by more than 10%. Foreign investors recorded net equity outflows of approximately KRW 20.6tn in the first 20 days of March. We expect continued FX and equity volatility, with external factors—especially Middle East tensions and global energy price dynamics—remaining the dominant drivers, given South Korea’s high dependence on energy imports and its cyclical exposure to global trade."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

TD Securities’ Senior Commodity Strategist Daniel Ghali argues that Gold’s bull market is increasingly constrained as energy importers and Middle Eastern producers face shocks that erode official sector demand. With institutional and retail participation already elevated, TD’s simulations point to CTA selling in Gold over the coming week as algorithms capitulate on long positions for the first time since February 2024.

Bull trend faces CTA liquidation risk

"Energy importers, particularly in Asia, are facing a substantial energy shock that will significantly erode surpluses, easing the pace of diversification into gold. Middle Eastern nations face a severe economic shock that will similarly erode their gold purchases."

"Reports that Turkey has been mulling tapping into its gold reserve to defend the Lira abstract the fact that official sector gold demand is now facing its most significant headwinds since Russia-Ukraine."

"The rub: widespread institutional investor participation now has fewer outs, as the debasement trade rolls over with fewer Fed cuts, without excess money supply growth, and with alleviated concerns surrounding Fed independence into the Supreme Court decision for Lisa Cook's trial. "

"When you strip out the narratives, gold's bull market has been a function of a cascading set of capital pools that have participated in the yellow metal. The mechanics are analogous to a carry trade gone wrong, leaving a positioning washout as the balancing factor. "

"Widespread institutional adoption and unprecedented retail demand over the last months suggest the pain trade will likely remain to the downside. In the near-term, our simulations suggest that most scenarios will lead to CTA selling activity over the coming week, as algos capitulate on their longs for the first time since Feb 2024."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Rabobank’s Senior Macro Strategist Bas van Geffen notes that, against a backdrop of geopolitical risk, the EU is pushing to diversify its economic alliances, signing a free trade agreement with Australia after deals with Mercosur, India and Indonesia. The agreement combines tariff cuts, higher quotas for agricultural products, and a security and defence partnership, with an emphasis on access to Australia’s critical raw materials.

Brussels deepens Asia-Pacific trade links

"Amidst the geopolitical risks, the EU continues to seek diversification of its economic alliances. Brussels signed a free trade agreement with Australia, following on the deals with Mercosur, India, and Indonesia. Parliament still has to approve the deal, but this should be less contested than the Mercosur agreement."

"The EU-Australia deal includes a combination of tariff cuts and higher quotas for certain dairy products, beef and sheep meat. Geographical product names are protected by the deal, to the displeasure of Australian farmers, who believe that access to the European market remains impeded."

"Trade Commissioner Sefcovic said that the deal should increase annual bilateral trade by about €20 billion over the next decade, but that’s arguably not the EU’s main motivation. "

"A security and defence partnership underscores the geopolitical motive, and improved access to Australia’s critical raw materials may be an extension of this."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• GBP/USD depreciates amid rising Middle East conflict. 
• Gulf states are near direct involvement in the Iran conflict, with Saudi Arabia signaling a potential military shift. 
• UK preliminary PMIs disappoint, with Composite output hitting a six-month low at 51.0.

The GBP/USD pair faces selling pressure on Tuesday after registering modest gains in the previous day, weighed down by a slight rebound in the US Dollar and softer-than-expected preliminary UK S&P Global Purchasing Managers Index (PMI) data. At the time of writing, the pair is trading near 1.3395 at the start of the American trading session.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.40, recovering part of the losses recorded on Monday.

The risk-sensitive pair also weakens amid rising risk aversion as US-aligned Gulf states move closer to direct involvement in the Iran conflict, with Saudi Arabia signaling a potential military shift, according to a Wall Street Journal report.

Israel launched its latest attack on Iran despite US President Donald Trump signaling a pause in strikes on energy infrastructure after what he described as productive talks with Tehran. However, Iran’s Foreign Minister Abbas Araghchi denied any engagement with Washington. Iranian Parliament Speaker Mohammad Bagher Ghalibaf also said on Monday that no negotiations had taken place with the US. Meanwhile, Iranian senior military adviser Mohsen Rezaei stated that the conflict would persist until Iran receives full compensation for the damage incurred.

Meanwhile, the latest UK S&P Global PMI data showed that business activity slowed in March as geopolitical tensions weighed on sentiment.

The Composite PMI fell to 51.0 from 53.7, missing expectations of 52.8 and marking a six-month low. The Services PMI dropped sharply to 51.2 from 53.9, well below the 53.0 forecast. The Manufacturing PMI edged down to 51.4 from 51.7, but slightly beat expectations of 51.1.

Attention now turns to the upcoming US preliminary PMI data due later on Tuesday, followed by the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports scheduled for Wednesday.

On the monetary policy front, the Bank of England (BoE) kept interest rates steady at 3.75% at its March meeting on Thursday, as widely expected. BoE Governor Andrew Bailey said the Middle East conflict will cause a "shock to the economy" and push up inflation in the near term, adding that restoring safe shipping through the Strait of Hormuz is key to addressing rising energy prices.

The Federal Reserve (Fed) also kept its benchmark interest rate unchanged in the 3.50%-3.75% range. Fed Chair Jerome Powell said in the post-meeting press conference that the central bank remains cautious as uncertainty surrounding the Middle East conflict and rising energy prices clouds the economic outlook. He noted that it is still too early to assess the full impact of higher oil prices on inflation and growth, adding that policymakers will continue to monitor incoming data before making any policy adjustments.