Overview: The US and EU struck a trade deal that is less onerous than threatened and reduces the uncertainty plaguing businesses and investors. In May, President Trump threatened a 50% tariff on most EU goods, and yesterday, agreed to 15% (including autos and pharma, but not metals). There seems to be some debate over whether quota and tariff system will apply to steel and aluminum. The EU reportedly agreed to purchase $750 bln of US energy, "vast amounts" of military equipment, and invest $600 bln in the US on top of existing investments. Last year, EU companies invested almost $97 bln in the US, which is mostly retained earnings as opposed to new flows and bought less than $100 bln of US oil and liquified natural gas.
The US dollar is firmer against all the G10 currencies as the North American session is about to get underway. The Antipodean currencies and the euro are the weakest, with 0.5%-0.60% losses. Sterling is the firmest, off about 0.1%. Emerging market currencies are also mostly softer, led by the central European complex. Equities are mostly higher, with notable exceptions being Japan and India in the Asia Pacific region, while Europe's Stoxx 600 is up ~0.6% to more than recoup its pre-weekend loss (-0.3%). US index futures are around 0.2%-0.5% firmer. Bonds are also rallied. Japanese 10-year yield and longer maturities eased 3-5 bp. Even the 10-year Chinese government bond, which has been rising, pulled back a little more than a basis point today. European benchmark 10-year yields are mostly 2-3 bp softer and the 10-year US Treasury yield is a couple basis points lower, slightly below 4.37%. Gold is nearly flat after initially extending last week's decline to almost $3324 today. September WTI held above $65 but has been capped near $66.80.
USD: The Dollar Index posted its highest settlement in four sessions ahead of the weekend and looks poised to extend its gains. It has moved above 98.00 today. Nearby resistance is seen in the 98.25-50 area initially. The big week for the US begins slowly. Only the Dallas Fed manufacturing survey is due today and it tends not to attract much attention. Fasten your seatbelt for turbulence starting tomorrow with the June goods trade balance (slightly wider deficit expected) and inventory data, while will help economists fine-tune forecasts for Q2 GDP (released Wednesday). House prices, the June JOLTS report and the Conference Board's measure of July consumer confidence are also due tomorrow. The outcome of the FOMC meeting would normally be the highlight but it is rivaled by the July jobs data on Friday, which is also the ostensible end of the postponement of the reciprocal tariffs. Top Chinese and American negotiators meet in Sweden today and tomorrow. The greenback may respond positively to headlines confirming what US Treasury Secretary Bessent seemed to suggest would likely be a 90-day extension of the Sino-American tariff truce. The US has a long wish-list for China, but outside of some technology does not seem to be willing to make other concessions around Beijing's redlines. Chinese leaders seem content to sit back and watch what it thinks is the Washington's self-immolation.
EURO: The euro's recovery from almost $1.1555 on July 17 faltered last week near $1.1790. It has traded on both sides of last Friday's range and is below its low (~$1.1705), for a potentially bearish outside down day. Although the five-day moving average pushed above the 20-day moving average, the euro looks vulnerable and a break of $1.1645 could since a test on the mid-July low near $1.1555. The full details of the trade deal have not been released, but the downside tail risks have been reduced even though the ratification process looks challenging. This week's highlights include an initial look at Q2 GDP. The median forecast in Bloomberg's survey sees a stagnant quarter after 0.6% growth was recorded in Q1 (quarter-over-quarter). The other highlight is the preliminary estimate of July CPI. Given that the flat July 2024 reading will drop out of the 12-month comparison, the risk is that the headline year-over-year pace ticks up for the second consecutive month after bottoming at 1.9% in May.
CNY: The low for the year, set last Thursday (CNY7.1490 and ~CNH7.1440) may mark an important near-term extreme. The dollar jumped to almost CNY7.17 and CNH7.1710 before the weekend. It reached almost CNH7.1770 today. The PBOC set the dollar's reference rate at CNY7.1467 (CNY7.1419 at the end of last week and CNY7.1385 last Thursday). Top US and Chinese officials meet today and tomorrow in Stockholm. Last week's EU-China summit lasted one day and seemed not to have concrete results. US Treasury Secretary Bessent has already floated the idea that the August 12 end of the tariff truce may be extended another 90 days. China may acquiesce. Why not? It perceives time is on its side. In a little more than six-months into his second term, President Trump has done more to weaken the alliance than Beijing could have rightly hoped for. The Trump administration is gutting the institutions of soft power. Chinese programing has filled the vacuum created by the termination of Voice of America in countries ranging from Indonesia to Nigeria. At the same time, China's dominance in several key supply chains, rare earths, drones, and EV batteries, to name but three. Pharma could be next. June industrial profits were reported over the weekend and were off 4.3% year-over-year. This underscores Beijing's new campaign against "involution" or ruinous competition (over-investment, competition for market share). China reports the July PMI early Thursday. The composite finished last year at 52.2. It averaged 50.9 in Q1 and 50.4 in Q2.
JPY: The dollar bottomed last Thursday near JPY145.85. Its recovery began then and extended into the pre-weekend activity that saw it reach almost JPY147.95. This met the (61.8%) retracement of the leg down from the peak on July 16 near JPY149.20. The gains have been extended to slightly above JPY148.35. A move above JPY148.40 re-targets that mid-July high. Japan's big week is backloaded. The key data and big events are on Thursday. Before the outcome of the BOJ meeting on Thursday is announced, Japan will report June retail sales and industrial production. Retail sales are expected to rebound from the 0.6% decline in May. On the other hand, industrial production is seen falling for the third consecutive month. The BOJ is expected to stand pat, but with the trade agreement struck, the market is more confident that the Governor Ueda will be able to lead the central bank to take another step of normalizing monetary policy with a rate hike toward the end of the year. The BOJ will update its forecasts, which are understood to be part of its forward guidance,
GBP: Poor economic data took a toll on sterling last week. It was practically flat on the week, putting it at the bottom of the G10 currency performances last week, edging out the Canadian dollar for the dubious honor. It ended last week with two days of losses that brought it to roughly $1.3415. Today, it has edged close to $1.3400. Sterling appears to be forming a potential topping chart pattern. A break of the neckline, seen in the $1.3365-70 area would boost confidence in the pattern. The measuring objective is around $1.2940, which coincides with other technical markers. It is a light week for UK economic data. Consumer credit and mortgage lending are the highlights in the otherwise light diary. The Bank of England meets on August 7, and the swaps market remains confident of a rate cut (~95%).
CAD: The market rejected the attempt by the greenback bears to test the July low (~CAD1.3555), which itself was a little above the year's low from June 16 (~CAD1.3540). The greenback rebounded smartly to CAD1.3725 ahead of the weekend and a little above CAD1.3740 today. There is a little chart resistance ahead of CAD1.3775. A few hours before the FOMC meeting concludes on Wednesday, the Bank of Canada will most likely announce that it stands pat with its interest rate target at 2.75%. It will be the third meeting that it did not change policy. It previously signaled that there might be one cut left in the cycle. Even after the poor June retail sales (-1.1%), the swaps market is not convinced another cut will be delivered this year. Indicative pricing suggests a cut by the end of the year. The probability is now a little more than 55%, down from about 75% last Tuesday.
AUD: The Australian dollar reached a new high for the year at $0.6625 last Thursday before reversing lower and pulling back to $0.6550 ahead of the weekend, where the 20-day moving average was found. Follow-through selling today has extended the Aussie's pullback and it has slipped through the (61.8%) retracement of its recent leg up, seen near $0.6520. A break of $0.6500 could spur another half-cent decline. Australia economic diary is light until Wednesday-Thursday when it reports quarterly CPI followed by June retail sales and private sector credit. The central bank puts more weight on the quarterly CPI rather than the relatively new monthly series. Still, the monthly readings suggest a slight cooling of the quarterly inflation. Q2 CPI is seen slowing to 2.2% from 2.4% and the underlying measures may tick down. Nominal retail sales may have risen by 0.3% in June but when adjusted for inflation, may have been flat in Q2 for the second consecutive quarter. The RBA meets on August 12, and the futures market continues to fully discount a quarter-point cut. Moreover, it has another cut fully discounted in Q4. Two quarter-point cuts would bring the overnight rate target to 3.35%. The swaps market has another cut nearly fully priced in 2026.
MXN: The dollar made a new low for the year last week (~MXN18.5250) and remained pinned in the in the trough. It retested the low ahead of the weekend and when it held, the dollar was squeezed up to almost MXN18.5950 where sellers were lurking. The dollar initially fell to a new low (MXN18.5110) earlier today but has rebounded a little through MXN18.63. It is posting a bullish outside up day. Nearby resistance is seen near MXN18.66. Mexico reports June unemployment and trade figures today. The highlight of the week is the first estimate of Q2 GDP on Wednesday. Economists warn of the risk of a small contraction (-0.1%) following the 0.2% expansion in Q1. The unemployment rate may have edged higher for the third consecutive month. The 2.75% reading in May was the highest print since last September. In the first five months of 2025, Mexico recorded a trade surplus of about $2.04 bln. This is a dramatic improvement from the $4.46 bln deficit in the Jan-May 2024 period and the $6.56 bln shortfall in the first five months of 2023. The improvement is a result of a 3.4% increase in exports and a more modest 0.8% increase in imports.
Reviewed by Marc Chandler
on
July 28, 2025
Rating:
