ECB President Lagarde expressed confidence in managing inflation from over 10% in 2022 without triggering a eurozone recession, with the ECB expected to maintain its 2% deposit rate at Thursday’s meeting. Despite President Trump’s threatened 30% tariffs on EU imports, which could slow growth and inflation if exceeding 10%, the ECB is likely to hold off on immediate action, possibly signaling a September rate cut if risks intensify. Markets anticipate the ECB’s next cut may be its last this cycle, while expecting more Fed cuts, boosting EURUSD optimism. The ECB’s bank lending survey, upcoming PMI data, and Germany’s IFO index will provide insights into tariff impacts, as the EU, led by countries like Germany, prepares potential “anti-coercion” countermeasures against the U.S. if trade talks fail. Meanwhile, the Kremlin supports new Ukraine peace talks, but significant diplomatic gaps remain.

Japanese Prime Minister Shigeru Ishiba faces growing pressure after his coalition’s loss of its upper house majority, potentially complicating U.S.-Japan trade talks and increasing calls for his resignation if he fails to prevent steep U.S. auto tariffs. The yen weakened as expected, with markets having anticipated the coalition’s defeat, but the USDJPY rise is likely capped as focus shifts to coalition negotiations and ongoing trade discussions. The Bank of Japan’s monetary normalization faces hurdles due to political pressure for fiscal stimulus, though sustained wage growth and firm inflation expectations should keep gradual normalization on track. However, yen bullish factors, like a swift U.S.-Japan trade deal or BOJ policy progress, now face higher obstacles, potentially fueling further yen weakness if bond market volatility prompts BOJ adjustments.

The Australian dollar weakened slightly against the US dollar, after the Reserve Bank of Australia minutes revealed a cautious approach to further interest rate cuts, emphasizing a “gradual” easing strategy. The RBA is awaiting confirmation that inflation will sustainably hit its target, with next week’s Q2 CPI data and updated staff forecasts critical for its August 12 meeting. Attention now turns to RBA Governor Bullock’s upcoming speech, especially after June’s unexpected unemployment rise to 4.3%.