2025-08-01 12:02

Key takeaways As widely expected, the Fed left policy rates steady, though with two dissenting votes for an immediate cut. The overall guidance from the Fed suggests a patient policy, sending the DXY higher… … but the USD still faces downside from political and structural drivers, and the return of cyclical headwinds. The Federal Open Market Committee (FOMC) kept the federal funds target range steady at 4.25-4.50% for a fifth consecutive meeting in July. This came in line with market expectations. The accompanying statement had one dovish change, with the new observation that “economic activity moderated in the first half of the year”. In addition, there were two dissenting votes from the Federal Reserve (Fed) Governor Christopher Waller and Michelle Bowman who called for an immediate 25bp cut. The market impact of this dissent was modest, however, as the views are still evidently dovish outliers on the FOMC. Fed Chair Powell’s overall comments show that most of the policymakers still support a wait-and-see approach to any future rate cuts. Crucially, Chair Powell talked of the “coming months” when describing the timeframe over which the data would be analysed to decide on next steps. While this does not rule out a cut at the next meeting on 16-17 September, it did not indicate that policymakers were any closer to delivering an easing than they were at the June meeting. Our economists still expect 75bp of cumulative Fed rate cuts through this year and next, delivered in three 25bp steps: September, December, and next March. Following Chair Powell’s press conference, the US Dollar Index (DXY) surged to as high as 99.98 (Bloomberg, 31 July 2025), as markets have pared expectations for a September rate cut. Rates market now views a September cut as a 50:50 call, down from a c66% likelihood attached to this outcome ahead of the July meeting. Source: Bloomberg, HSBC Cyclical headwinds (via narrowing yield differentials) for the USD are easing for now but may return when the Fed resumes its rate-cutting cycle. Questions still remain over US trade policy, the path for the US budget deficit, and the political pressure on the Fed. The USD still faces headwinds from political and, to a lesser extent, structural drivers. All this points to a soft USD in the months ahead. Still, recent USD price action is a challenge to those who argue for persistent currency weakness that would extend into 2026 – a narrative we do not agree. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-the-fed-remains-patient-on-rate-cuts/

2025-08-01 07:04

Key takeaways The higher fiscal deficit concerns caused by the One Big Beautiful Bill, which included significant tax and spending cuts, and broad policy shifts, will likely be offset by expectations of Fed rate cuts and benign inflation. Meanwhile, solid Q2 earnings growth reinforces our US overweight positions in IT, Communications, Industrials and Financials as they benefit from the bill and structural trends. More regulatory clarity (e.g., GENIUS Act) is also a positive. Following the US-Japan trade deal, which lowered Japanese tariffs to 15%, the US and the EU also announced a 15% tariff rate on most EU goods sold to the US, plus additional investments in US energy products and military equipment. These deals have de-escalated global trade tensions substantially. We maintain a risk-on stance and mitigate uncertainty through multi-assets, including quality bonds (e.g., UK gilts) and gold. While China’s 5.2% GDP growth for Q2 has raised hopes of reaching the government’s full-year target of around 5%, economic data remain mixed. The Chinese authority has introduced supply-related measures to address the deflationary pressures caused by overcapacity in the areas of solar, steel, auto, lithium batteries, etc., which boosted market sentiment. In Asia, we remain overweight in China, India and Singapore, and neutral in Japan following the loss of its ruling coalition’s majority in both parliamentary houses. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/positive-drivers-boost-market-optimism-amid-progress-on-trade-deals/

2025-07-31 12:02

Key takeaways In a move largely anticipated by markets and us, the Federal Reserve left interest rates unchanged at 4.25%–4.50%, but the meeting was still seen as slightly hawkish. The Fed noted that economic activity has “moderated” in recent months, while inflation remains elevated but continues to ease. Fed Chair Jerome Powell reiterated that the “main number you have to look at now is the unemployment rate,” since labour supply and labour demand appear to be slowing in tandem. Mr. Powell emphasised his data-dependent approach and offered no clear timelines for cuts, signalling the Fed’s intent to keep rates high until inflation convincingly moves toward the 2% target. We maintain our overweight on US equities, given the economy’s relative strength to other markets, strong earnings growth, the Fed’s eventual pivot, and the tailwinds from structural themes around technology and AI revolution, the re-industrialisation of the US economy, and reshoring of key industries, which together support a favourable risk-reward outlook. We remain neutral overall on fixed income but continue to tactically add high quality bonds for income and stability, using an active approach to find selective opportunites. We still forecast 0.75% of cumulative Fed rate cuts through this year and next. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/strong-economy-and-tariff-uncertainty-keep-hawkish-fed-on-hold-again/

2025-07-29 07:05

Key takeaways The European Union (EU) and the US reached a trade deal on 27 July, agreeing on a 15% tariff rate to be imposed on EU goods sold to the US, starting 1 August. However, details of sectoral tariffs, namely pharmaceuticals and semiconductors may not be fully clear. Other key terms of the deal include a USD750 billion purchase of US energy products and chips and USD600 billion of additional US investments from the EU. Although the Eurozone is ultimately left with a higher baseline tariff of 15% compared to the 10% level it was hoping to achieve, the incremental downside risks to growth should be manageable given that “certainty” may pave the way for stabilisation in sentiment or a bottoming out in tariff-exposed sectors. We keep our neutral view on Europe ex-UK equities with a preference for Industrials, Financials and Utilities. Our preferred exposure in the fixed income space lies with investment grade bonds of 7-10- year duration. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/eu-us-deal-eases-near-term-downside-risks/

2025-07-28 08:06

Key takeaways The ECB was on hold in July, as widely expected. The EUR is still much stronger than what its yield differential implies, which assumes a ‘good case’ outcome on tariffs. Risks for the EUR are skewed to the downside if trade tensions intensify and/or evidence of economic weakness emerge. On 24 July, the European Central Bank (ECB) kept its deposit rate steady at 2% for the first time in more than a year, after slashing rates by 2% in total since the beginning of the easing cycle in June 2024. The statement stresses that the environment remains exceptionally uncertain, especially because of trade disputes, with risks to growth remaining tilted to the downside. Having said that, ECB President Lagarde seemed to focus on the positive impact of a possible trade deal lifting uncertainty and also reaffirmed that the central bank is in a very good place to hold and watch how the risks will evolve over the next few months. While plenty of uncertainty remains, our economists think that the ECB is done cutting rates if the EUR stays around the current level. But if EUR-USD were to head towards the 1.25-1.30 range, this could mean a bigger inflation undershooting, pushing the ECB to reconsider cutting rates in December or early next year. Markets have also pared back expectations of further ECB easing, currently pricing in a c20% chance of a rate cut in September (Bloomberg, 24 July 2025). It is worth noting that the EUR still enjoys an unusually large premium relative to the interest rate differential (Chart 1), which assumes a ‘good case’ outcome on tariffs. Media reports suggest that the US and the EU are closing in on a trade deal which would place 15% tariffs on the EU (FT, Bloomberg, 23 July) − higher than the 10% ‘baseline’, but certainly not as impactful as a 30% rate. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, the EUR is returning to its ‘risk on’ persona (Chart 2). Any material escalation in tariffs could see risk aversion, probably weighing on the EUR. Conversely, trade deals with lower tariff levels could support risk appetite, which is likely to be EUR-positive. As such, we look for the EUR to move mostly sideways in the weeks ahead; but risks are skewed to the downside, especially if trade tensions intensify or evidence of Eurozone economic weakness emerges. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-return-to-risk-on-persona/

2025-07-28 07:04

Key takeaways Japan’s ruling coalition lost its majority in the Upper House election, with market focus moving to US tariffs. The post-election drop in USD-JPY appears to be a little unconvincing. Unless there is a breakthrough in trade talks, the JPY is likely to underperform the USD over the near term. In Japan’s upper house election on 20 July, the Liberal Democratic Party (LDP) and its junior coalition partner, Komeito, failed to secure enough seats (at least 50 out of the 124 seats up for re-election) to hold on to their majority (Chart 1). This marks the second consecutive defeat for the LDP under Prime Minister Shigeru Ishiba’s leadership following last October’s lower house election. Despite the electoral setback which deprived the LDP of a majority in both legislative houses for the first time since 1955, Prime Minister (PM) Ishiba has publicly vowed to stay on as Japan’s leader. Source: Media reports, HSBC Source: Bloomberg, HSBC We are not convinced that the post-election dip in USD-JPY will be sustained (Chart 2). Perhaps, there is some relief in the FX market that things did not come out even worse for the ruling coalition, with the announcement by PM Ishiba removing some political uncertainty. However, without a majority in either parliamentary house, the ruling coalition will likely have to compromise with opposition parties to pass legislation. This could see looser fiscal policy and complicate the Bank of Japan's (BoJ) path to monetary policy normalisation, while our economists still expect a BoJ hike in 4Q25. The immediate focus may now move to whether a US-Japan trade deal can be struck before 1 August. Markets may still see challenges for Japan to get a favourable trade deal. Any failure to secure a deal could see the JPY weaken, more so if other nations are successful in their negotiations. That being said, the likely extent of any USD-JPY bounce could be curtailed by the possibility of FX intervention by Japan’s Ministry of Finance (MoF), with rhetoric already more evident ahead of key levels around 150 and 152. There were already some verbal comments from Finance Minister, Katsunobu Kato, and Deputy Chief Cabinet Secretary, Kazuhiko Aoki (Bloomberg, 17 July 2025). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-ruling-coalition-loses-upper-house-majority/