One major bank’s economists note the ECB is cautiously approaching further interest rate cuts, despite a stronger euro potentially pushing inflation below the 2% target, as rate changes take time to impact the economy and the euro’s rise is less significant against a basket of currencies. Eurozone companies, facing profit pressures, are encouraged to use the stronger euro to rebuild margins rather than lower prices. Large-scale fiscal spending is expected to offset any negative effects of the euro’s strength, while market expectations of limited Fed rate cuts and potential U.S. trade developments support a bullish outlook for the euro against the dollar.

Investors doubt a significant rebound in longer-dated Japanese Government Bonds due to expectations of increased government spending following Japan’s upper house election on July 20, 2025, as the ruling LDP’s low approval ratings may force PM Ishiba’s minority government to concede to opposition demands for more fiscal stimulus. The Bank of Japan is unlikely to raise interest rates soon, as rising long-term yields already tighten financial conditions, compounded by threats of U.S. tariffs and a record 19.4% drop in vehicle export prices, which could hurt automakers’ profitability and wage growth—a key BOJ goal. With negative real interest rates in Japan and widening U.S.-Japan yield differentials, the USDJPY exchange rate may test higher levels, with markets eyeing upcoming U.S. CPI data.

The Australian dollar has held strong above its 50-day moving average after the Reserve Bank of Australia unexpectedly kept the Official Cash Rate at 3.85%, defying market expectations of a cut. Prime Minister Albanese’s upcoming visit to China from July 12-18 aims to improve trade and diplomatic ties, potentially boosting Australian exports and supporting the AUD. Additionally, China’s efforts to stabilize its economy, curb price wars, and achieve strong 5.4% GDP growth in Q1 2025 create a favorable environment for Australian exports, further strengthening the Australian Dollar.