Trade Winds & Euro Tides: FX Markets React to US-Japan Pact and Shifting Global Flows.
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US-Japan Trade Deal: Equity markets cheer a “win-win” deal that reduces tariffs and promises major Japanese investment in the US.
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Yen Held Back by Politics: Despite bullish signals from markets, JPY stays flat due to looming political uncertainty in Japan.
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Commodities & EM FX Rally: Industrial metals’ surge boosts currencies like AUD, BRL, and ZAR—also hedges against Fed risk.
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Euro Quietly Gaining: Capital rotation and reserve demand fuel euro strength across the board, particularly against USD and GBP.
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Pound Under Pressure: Sterling’s decline is driven by UK economic softness and growing expectations for BoE rate cuts.
USD: Trade Deals Breathe Life into Risk Assets
Global equity markets have rallied after President Trump unveiled a new trade agreement between the US and Japan. The deal is seen as a mutual win: the US lowers auto tariffs to 15% (instead of the previously threatened 25%+), while Japan agrees to buy US aircraft, rice, and—surprisingly—establish a $550 billion sovereign wealth fund to invest in America under Trump’s guidance. Whether that fund materialises remains to be seen.
In Japan, markets responded positively: equities rose 3%, 10-year government bond yields climbed 6 basis points, and the 1-month JPY OIS rate (priced one year forward) increased by 8 basis points—generally yen-positive moves. Yet USD/JPY remains flat around 147. The likely reason? Political uncertainty. Prime Minister Ishiba may resign following poor election results, creating questions around fiscal policy, central bank pressure, and stability—keeping JPY gains in check.
Elsewhere, industrial metals are pushing higher, boosting trade-sensitive currencies like AUD, BRL, and ZAR. These currencies may also serve as hedges against the risk of Fed Chair Powell being replaced, and commodities are increasingly viewed as an inflation shield should the Fed pivot too soon.
The USD itself has shown weakness. Losses this week might reflect delayed reactions to softer US yields or capital shifting into Europe and emerging markets on improving global growth expectations. US housing data (existing home sales) is due, with a possible upside surprise if recent mortgage application trends hold—potentially providing a small lift to the DXY back toward 98.
EUR: Subtly Strong Amid Capital Rotation
EUR/USD moved through its previous 1.1720 high with ease—surprising some analysts. While concerns over another round of US tariffs may have driven demand, the overnight US-Japan deal should help reduce those fears. Cross-asset indicators also didn’t suggest widespread panic.
More likely, this is a story of investor rotation: moving out of equities, bonds, and credit into euro-denominated assets. Credit markets show rising global demand for euro instruments, and issuers are responding. It’s a quiet but potentially powerful theme in euro strength.
Technical charts support further upside in EUR/USD following recent consolidation. But if USD/JPY stabilises and US housing data comes in strong, EUR/USD could pull back toward 1.1680 today. Also watch for slight improvements in eurozone consumer confidence.
GBP: Euro Remains on the Front Foot Against Sterling
Lloyds Bank sees continued upside for the euro against the pound. The EUR/GBP pair has held firm above 0.86 and is eyeing resistance at 0.8738 (post-“Liberation Day” high) and 0.8768 (December 2023 high). While progress is slow, the uptrend remains intact.
Tactically, Lloyds recommends maintaining long EUR/GBP positions, using the 21-day moving average as support and targeting 0.8738 in coming weeks. From the pound’s perspective, this resistance at 0.86 corresponds to a support level around 1.1630 in GBP/EUR.
The pound has weakened steadily since late May, weighed down by euro strength and broader global shifts. ING Bank attributes the euro’s gains to its emerging role as a reserve currency during global repositioning.
For the UK, weaker economic indicators and rising expectations for Bank of England rate cuts (one likely in August and another in December) are undermining sterling further.