Insights 
VT 
During the Asian trading session on Thursday, 5 June 2025, major currencies experienced minimal movement amid limited news. The primary focus was on Japanese wage data and China’s Caixin Services PMI.
In Japan, wages increased year-on-year in April, with base pay seeing the quickest growth in four months. Despite this, inflation persisted, reducing household purchasing power, as real wages declined for a fourth consecutive month. This presents complications for the Bank of Japan’s plans to adjust its monetary policy.
Caixin Services PMI Shows Growth
China’s Caixin/S&P Global Services PMI for May rose to 51.1 from April’s 50.7, indicating 29 months of continuous expansion from January 2023. This figure slightly exceeded expectations of 51.0, driven by better domestic demand and business confidence, though foreign demand entered contraction for the first time this year. The Composite PMI fell to 49.6, its lowest since December 2022, due to weak manufacturing data.
The FX market remained quiet as traders awaited the European Central Bank’s decision, where a 25 basis point rate cut was anticipated. The ECB decision is scheduled for 1215 GMT/0815 US Eastern time, with a press conference by Lagarde following shortly after.
With most Asian currencies treading water, the early hours of Thursday unfolded more as a waiting room than a trading floor. No urgency, just a flicker of attention cast at data out of Tokyo and Beijing. In Japan’s case, a modest increase in basic wages might look encouraging at first glance—after all, it marked the sharpest rise in four months. However, factoring in inflation tells a different story. The real buying power of households has now declined for the fourth straight month, meaning whatever wage growth came through was eroded entirely. We’re seeing the usual problem: monetary policy can’t fix everything when it runs up against daily living costs refusing to calm down.
Beijing’s picture was a little more mixed. The service sector continued its expansion streak, stretching it to nearly two-and-a-half years. A slight beat on expectations may have caught some off guard, but it was far from extraordinary. The domestic economy showed some resilience, likely pushed along by internal demand and a mild uptick in business confidence. However, the shine dims somewhat with foreign demand declining—this was the first contraction in overseas services business since December. On top of that, the broader composite figure dropped below the neutral 50 mark, dragged down by lacklustre factory output. That suggests one part of the economy moves forward while the other holds it back.
Market Focus Shifts to ECB Decision
Most eyes, though, were elsewhere—fixed firmly on Frankfurt. With the ECB set to deliver a much-flagged rate cut, the market had largely priced this in. What remains uncertain, and what matters more for short-term rate expectations, is the tone struck by Lagarde in the hours that follow. If she signals anything beyond the standard playbook, volatility could spike. Historically, the euro doesn’t move much on the headline decision; it often waits until the press conference to react. That’s where interpretation kicks in.
For us, the takeaway remains pointed. Monetary policy responses from major central banks are diverging, and that divergence has implications for relative yields—particularly across Europe and Asia. Japan hesitates. China pushes selectively. Europe looks to ease. We’re not pricing in harmony anymore. Yield differentials become more sensitive to forward guidance than the usual mix of inflation targets or employment goals. That changes how tactical positioning should be viewed.
It also means implied volatility at the short end could become increasingly reactive rather than predictive. Pre-positioning becomes risky when central bank narratives aren’t clearly coordinated. We’re seeing that traders now need to weigh not just data flow, but the market’s reaction to central bank language—nothing feels mechanical anymore.
In the coming weeks, a more tactful approach is better favoured. Traders should take into account recent moves in cross-currency basis swaps, particularly those involving euro and yen pairs, as any widening there would further hint at shifts in funding preferences and interest rate spreads. That in turn will filter directly into forward pricing and, ultimately, volatility skews.
Lagarde may deliver a reasonable message on Thursday afternoon, but the reaction in rates and FX will depend on how her tone balances incoming data against the policy path ahead. There’s little room for ambiguity in her phrasing without spooking markets. That pressure, while indirect, shifts to those of us trading on margin through options and futures structures closely tied to monetary signalling. Timing—even just by hours—becomes vital.
