The ECB’s 2Q25 Bank Lending Survey indicates stabilized lending conditions in the euro area, with interest rates no longer significantly impacting firm loan demand and rising mortgage demand suggesting a more accommodative ECB policy, especially after the deposit rate dropped to 2.00%. One European bank notes the ECB may resume rate cuts if U.S. tariffs exceed 20% post-August 1, but could hold steady if tariffs fall to 10-15% with limited retaliation, awaiting clarity on EU-U.S. trade. Markets anticipate the ECB will maintain rates on Thursday but may signal a slight dovish tilt due to tariff uncertainties and the euro’s strength, while a potential U.S.-Europe trade deal could reduce downside risks, possibly stabilizing ECB rates as they approach a neutral zone.

President Trump announced a trade deal with Japan, involving a $550 billion Japanese investment in the U.S. and 15% tariffs on Japanese imports, with provisions for increased U.S. automobile and agricultural exports to Japan. Details on the elimination of existing 25% tariffs on Japanese cars remain unclear, and the yen faces potential further weakness as markets await more information. Political instability in Japan, following the LDP-Komeito coalition’s loss of majority in the upper house, may push Prime Minister Ishiba to resign, complicating the Bank of Japan’s plans for rate hikes. The LDP will meet on July 31 to discuss election results and Ishiba’s leadership, while opposition parties advocate for fiscal stimulus and looser monetary policies, potentially pressuring the BOJ to delay tightening despite rising inflation.

The Reserve Bank of Australia maintained the Official Cash Rate at 3.85% for the third time in four meetings, with six of nine members voting to hold rates, favoring a cautious approach to monetary policy. The RBA noted that policy remains modestly restrictive, awaiting confirmation that inflation is sustainably nearing its target, with upcoming second-quarter inflation data likely pivotal for a potential rate cut in August. Weak jobs data, showing unemployment rising to 4.3%, has increased expectations for an August cut, with markets anticipating 66 basis points of cuts by year-end. Additionally, the RBA believes tariff fears have peaked, and China’s stable economy reduces pressure for immediate stimulus, potentially limiting Australian dollar strength in the near term.