Last week’s slightly higher German inflation and stable Euro area inflation aligned with ECB targets, suggesting the ECB may be nearing the end of its rate-cutting cycle. A weaker US jobs report last Friday triggered a sharp EURUSD rebound, as hopes for earlier Fed rate cuts grew, with some analysts predicting a potential 50bps cut in September if US labor markets weaken further. The euro outperformed most G10 currencies, boosted by unwinding short positions, while ECB official Christodoulos Patsalides highlighted the eurozone’s resilience despite global tensions and a US-EU trade deal, emphasizing data-dependent ECB policy. One institutional shop noted potential eurozone growth challenges from the trade deal’s 15% tariff but expect the euro to rise against a weakening dollar as global portfolios diversify. This week’s key Eurozone data includes the August Sentix Investor Confidence, June PPI, June Retail Sales, and the ECB Economic Bulletin, offering insights into monetary policy and economic projections.

Last week, the USDJPY rose due to Japan’s political instability, a hawkish U.S. Federal Reserve, and the Bank of Japan’s unchanged 0.5% interest rate despite a higher 2.7% inflation forecast for 2025. A disappointing U.S. jobs report reversed this trend, triggering a dollar sell-off and erasing the week’s gains as traders exited long USDJPY positions. Looking ahead, markets will monitor Japan’s upcoming wage and household spending data, BOJ meeting minutes, and a 30-year JGB auction, alongside U.S. employment and inflation indicators, for signals on future rate changes. Political uncertainty in Japan and potential Fed policy shifts could further influence yen volatility, with USDJPY maintaining a bullish bias above 145.76-145.86, though a dovish Fed shift may weaken the dollar against G10 currencies.

Last Friday, G10 currencies, particularly the Yen and Euro, rallied against the dollar due to weaker-than-expected U.S. labor data, boosting expectations for a Federal Reserve rate cut in September, though Trump’s tariff announcements tempered gains for antipodean currencies, which saw the smallest increase. In Australia, Q2 CPI data came in slightly below expectations, supporting a likely 25bps rate cut by the RBA in August, with inflation aligning with RBA projections and the unemployment rate at 4.3% still near full employment. Strong June retail sales (up 1.2% MoM) and building approvals (up 11.9% MoM) suggest resilient consumer spending and a potential housing sector recovery, but Bloomberg notes spending growth was driven by discounts and may not be sustainable, with markets anticipating at least two RBA rate cuts this year unless economic strength prompts a pause.

The Federal Reserve’s decision to maintain high interest rates at 4.5%, the highest among G10 central banks, reflects a cautious “wait and see” approach, potentially pressuring the EURUSD exchange rate in the near term. The euro area economy grew slightly by 0.1% in Q2, avoiding stagnation but showing weaknesses in Germany and Italy, partly due to uncertainties from new U.S. tariffs impacting trade. Despite these challenges, Pimco analysts predict the euro may strengthen against a weakening dollar as global portfolios diversify, with U.S. trade policies possibly reducing demand for U.S. assets. German inflation dipping below the ECB’s 2% target and a resilient labor market further support expectations of controlled inflation in the eurozone.

The Bank of Japan maintained its interest rate at 0.5% and raised its inflation forecasts for 2025–2027, citing higher food prices, while slightly increasing its 2025 growth projection. Governor Ueda downplayed the likelihood of an imminent rate hike, emphasizing uncertainties like U.S. tariffs and global trade, leading markets to reduce expectations for near-term policy tightening. The dovish stance, combined with wide rate differentials with the U.S. Federal Reserve, strengthened USDJPY, with potential for further yen weakness amid political challenges and limited expectations of intervention by Japan’s Ministry of Finance.

Australia’s Q2 CPI rose slightly below expectations at 0.7% quarterly and 2.1% annually, supporting a likely 25bps rate cut by the RBA in August. The trimmed mean CPI of 2.7% aligned with RBA forecasts, indicating contained inflation. Despite a rise in unemployment to 4.3%, the RBA views it as near full employment. Strong retail sales (1.2% MoM) and building approvals (11.9% MoM) suggest robust consumer spending and a potential housing sector recovery, though sustained growth remains uncertain. Markets anticipate at least two rate cuts in 2025, but strong economic data could prompt the RBA to pause.

After the FOMC meeting and strong US economic data, G10 currencies weakened against the dollar, with the euro stabilizing after a sharp sell-off pushed its RSI into oversold territory. The euro area economy grew by 0.1% in Q2, beating expectations but masking weaknesses in Germany and Italy, further pressured by new US-EU trade tariffs that could reduce GDP by 0.3-0.5%. Euro zone wage growth is projected to slow to 2.6% in Q1 2026, down from 3.1% in Q4 2025, raising concerns about undershooting the ECB’s 2% inflation target. Despite these challenges, the ECB remains cautious about further rate cuts, preferring to monitor economic developments before acting.

With the U.S. economy showing resilience and strengthening the dollar, attention turns to the upcoming Bank of Japan meeting, where rates are expected to remain steady while the BOJ may raise its inflation outlook. Despite recent data showing robust retail sales and industrial production, indicating economic momentum, the BOJ’s cautious “risk management approach” could signal no immediate rate hikes, potentially weakening the yen if markets perceive a dovish stance. Suntory Holdings CEO Takeshi Ninami urges the BOJ to raise rates to counter yen weakness and inflation pressures impacting daily life in Japan.

Chinese trade negotiator Li Chenggang announced an extension of the US-China trade truce in Stockholm, though US Treasury Secretary Bessent noted that final approval from Trump is pending due to unresolved technical details. No major agreements were confirmed, but both sides appear committed to avoiding escalation, keeping future trade deal possibilities open. Meanwhile, China’s massive Yarlung Zangbo dam project could boost demand for heavy equipment and commodities like steel and cement, potentially benefiting Australia’s economy due to its iron ore exports. Australia’s Q2 CPI data came in below expectations at 0.7% QoQ and 2.1% YoY, supporting expectations for a 25bps rate cut by the RBA in August, with economists noting that inflation is under control and monetary policy may ease further.

Euro area inflation expectations dipped slightly to 2.6% for one year, while three-year expectations held steady at 2.4%, according to the ECB. ECB officials, including Gabriel Makhlouf and President Christine Lagarde, see no rush to cut interest rates, citing stable inflation and steady growth, though a new 15% US tariff on EU goods could slow economic progress despite reducing trade uncertainty. The euro weakened sharply after a perceived lopsided US-EU trade deal, sparking criticism of European Commission President Ursula von der Leyen and fueling market concerns that the non-binding agreement might unravel, with formal negotiations potentially taking years. European leaders and markets are now grappling with the deal’s implications, but some see it as a chance to push for economic reforms and diversify trade partnerships, while markets may soon focus on the EU avoiding a worse outcome and the possibility of prolonged ECB rate pauses.

Political turmoil in Japan is intensifying as a backlash against a US-Japan trade deal, criticized for threatening sovereignty, fuels speculation that Prime Minister Ishiba may be forced to resign. The deal, involving a disputed $550 billion Japanese investment in the US with unclear profit-sharing terms, has sparked confusion and market concerns, potentially weakening the yen further. As the Bank of Japan adopts a cautious “risk management” approach amid political and economic uncertainties, markets expect steady policy, which could pressure the yen if perceived as dovish. Upcoming June retail sales, industrial production, and housing data, particularly strong retail figures from firms like UNIQLO, may influence yen trading ahead of the BOJ meeting, while business leaders urge rate hikes to counter yen weakness and rising inflation.

Markets are focused on US-China trade talks in Stockholm, with a potential extension of the August 12 truce deadline possibly boosting antipodean currencies like the Australian dollar. Australia’s Q2 CPI, due today, is expected to show inflation easing to 2.2% year-on-year, nearing the Reserve Bank of Australia’s 2%-3% target, potentially paving the way for a rate cut at the RBA’s August 11-12 meeting. However, RBA Governor Bullock’s recent comments on a resilient labor market and gradual inflation decline have tempered expectations for aggressive rate cuts, with markets now less certain of an August cut and scaling back hopes for consecutive cuts without stronger evidence of economic slowdown.

EU officials, initially aiming for a tariff-free trade deal with the US, settled for a 15% tariff rate, higher than the anticipated 10%, and made additional concessions. Lacking critical exports like rare earths, the EU, which mainly exports luxury goods, faced a weaker bargaining position, potentially pushing Europe to hasten economic reforms and diversify trade partners. The 15% tariff is unlikely to significantly disrupt EU growth or inflation, with the ECB maintaining its 2% deposit rate and viewing any inflation dip as temporary. While the euro weakened due to the lopsided deal, markets may soon focus on the EU avoiding a worse outcome, with expectations of divergent US and EU monetary policies influencing currency trends in the near term.

Despite the US-Japan trade deal, Prime Minister Ishiba’s position remains shaky due to the LDP minority status in both houses, with growing internal pressure for his resignation. If Ishiba steps down, Shinjiro Koizumi and Sanae Takaichi are leading contenders for LDP leadership; Koizumi supports the Bank of Japan’s independence, while Takaichi favors monetary easing and could resist BOJ rate hikes. The BOJ is expected to hold rates steady at its upcoming meeting, with markets focused on its inflation outlook and hints of future rate hikes, though a new “risk management approach” may justify caution despite strong inflation trends. June retail sales, industrial production, and housing data, particularly retail sales showing consumer strength, will influence yen trading before the BOJ meeting.

The market is focused on the upcoming FOMC meeting, where the Federal Reserve is expected to maintain a cautious, data-driven stance, boosting the U.S. dollar against other G10 currencies. Australian super funds, managing a A$4.1 trillion asset base, are reassessing U.S. investments and increasing AUD hedging to mitigate potential declines in the AUDUSD exchange rate. Australia’s Q2 CPI, due July 30, is projected to show inflation easing to 2.2% YoY, potentially prompting an RBA rate cut in August, though Governor Bullock’s recent hawkish remarks suggest a slower approach to rate cuts, supported by a stable labor market and slightly lower-than-expected core inflation. While markets still anticipate an August cut, expectations for aggressive, consecutive cuts have waned, with two cuts projected by year-end, likely in August and November.

The US and EU reached a 15% tariff deal on most EU exports, though disputes remain over whether pharmaceuticals are included, with steel and aluminum facing quotas. The EU offered concessions like buying $750 billion in US energy and investing $600 billion in the US, but European industry groups criticized the deal as unbalanced. The Euro saw a muted response but could strengthen as the ECB’s 2% deposit rate pause may hold, supported by stable inflation forecasts (2.0% for 2025) and positive Eurozone data, including a strong Q1 2025 GDP growth of 0.6% and a rising Composite PMI of 51.0. With expectations of US rate cuts growing, diverging central bank policies may bolster the Euro.

Despite the US-Japan trade deal reducing economic uncertainty, it offers little political protection for Japanese Prime Minister Ishiba, whose leadership faces scrutiny at an informal LDP meeting today that could lead to a leadership contest, with Shinjiro Koizumi and Sanae Takaichi as potential successors. Koizumi supports BOJ independence, while Takaichi’s preference for monetary easing and a weaker Yen could hinder rate hikes if she becomes PM. The BOJ is likely to hold rates steady at its Thursday meeting, with markets awaiting its inflation outlook and hints of future rate hikes, supported by strong economic data like June retail sales, which early reports suggest may show robust consumer spending.

The Australian Dollar is gaining strength due to positive market sentiment following US-Japan and US-EU trade deals, with expectations of a US-China tariff truce extension further boosting optimism. Australian super funds, managing A$4.1 trillion in assets, are likely increasing AUD hedging, supporting the currency’s rise to yearly highs. While the upcoming 2Q CPI report, expected to show inflation easing to 2.2% and core at 2.7%, may prompt an RBA rate cut in August, Governor Bullock’s recent comments downplaying aggressive cuts and highlighting a stable labor market despite a 4.3% unemployment rate have reduced expectations for multiple rate cuts, with markets now awaiting clearer signs of slowing inflation or weaker economic data.

The European Central Bank kept its deposit rate at 2% as expected, awaiting clarity on US-Euro trade talks and offering no hints on future rate moves due to uncertain tariff outcomes. Eurozone economic data shows growing momentum, with the Composite PMI rising to 51.0 in July, driven by stronger manufacturing and services sectors, alongside robust Q1 2025 GDP growth of 0.6%. Analysts suggest the ECB may pause rate cuts longer than anticipated, with some predicting a shift toward rate hikes if inflation rises and trade uncertainties ease. A potential 15% US-EU tariff deal could strengthen the euro by reducing economic risks, potentially pushing the Euro toward 1.1900–1.2000, especially if US rate cut expectations grow.

The Bank of Japan’s Deputy Governor Shinichi Uchida noted that a US trade deal has reduced economic uncertainty, boosting market optimism for potential rate hikes, though USDJPY weakened. Persistent inflation, with Tokyo’s July CPI at 2.9% and core measures steady at 3.1%, supports the BOJ’s policy normalization, but political uncertainty following the LDP’s electoral setback and potential leadership change could impact monetary policy. A possible shift to Sanae Takaichi as PM, who favors monetary easing and a weaker yen, might pressure the BOJ to delay rate hikes, while proposed consumption tax cuts could raise bond yields and further weaken the yen.

The Australian Dollar gained strength due to improved market optimism following a US-Japan trade deal, raising hopes for similar agreements with Europe and China. RBA Governor Michele Bullock’s recent comments reduced expectations for aggressive rate cuts, emphasizing a resilient labor market despite a rise in unemployment to 4.3% in June, which aligns with RBA forecasts. She highlighted that inflation is gradually approaching the 2.5% target, though the upcoming Q1 core inflation may be slightly below the expected 2.6%, and cautioned against overreacting to single data points. Bullock’s hawkish stance, noting the RBA’s restrained rate hikes in 2022-2023, led to higher Australian bond yields and a stronger AUD, with markets now less certain about an August rate cut and scaling back expectations for consecutive cuts without clearer signs of economic slowdown.

The Euro has been better bid amid rumors of a potential US-EU trade deal, similar to a recent US-Japan agreement, with the EU possibly facing 15% US tariffs instead of the threatened 30%. However, US trade advisor Peter Navarro cautioned against taking these rumors at face value. The European Central Bank is expected to pause its rate-cutting cycle today, maintaining the main rate at 2.15% and the deposit rate at 2%, as inflation hits the 2% target and the strong Euro curbs imported inflation. Eurozone economic data, including manufacturing and services PMIs, will be closely watched for signs of resilience amid trade uncertainties, with GDP growth projected to remain weak at 0.1% in Q3 2025 and 0.2% in Q4.

Rumors of Prime Minister Ishiba resigning by August have surfaced, despite his denials, following his coalition’s loss of the upper house majority. Japanese markets, however, are thriving, with the Nikkei surging 3.5% to a one-year high and Toyota shares soaring 14%, boosted by a favorable US-Japan trade deal reducing tariffs from 25% to 15% and Japan pledging $550 billion in US investments. The Yen strengthened against the dollar, though bond markets showed strain with 10-year JGB yields hitting a 2008 peak of 1.59%. Economic indicators are mixed. The Japan Composite PMI held steady at 51.5, signaling modest growth, but manufacturing contracted (PMI 48.8), while the services sector expanded strongly (PMI 53.5). Political uncertainty and trade developments could further influence Japan’s economic outlook.

The Australian dollar is gaining strength for the fourth consecutive session, driven by improved global trade sentiment following a tariff deal with Japan and progress in US-China trade talks. Australia’s economy is showing positive signs, with the Composite PMI rising to 53.6 in July, reflecting strong growth in both manufacturing and services sectors. However, caution persists due to a slowdown in the Westpac Leading Index, weaker commodity prices, and declining business confidence, while the Reserve Bank of Australia remains cautious, favoring gradual policy easing as inflation trends are monitored.

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.

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%.