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EUR/USD has scope to return more of last month’s gains after depreciating by 0.8% last week to slightly below 1.17 for the first time in three weeks. The next support level is around the significant 1.15 level. US President Donald Trump’s latest tariff threat – 30% on all EU goods starting August 1 unless a trade deal is reached – represents a significant escalation from previous proposals. European Commission President Ursula von der Leyen responded that the EU would also suspend countermeasures until early August and affirmed the bloc’s preference for a negotiated solution.
Although both sides want to avoid an all-out trade war, the fundamental mismatch in their approaches towards a trade deal remains difficult. The EU prefers trade deals that are rules-based, multilateral, and enforceable via the World Trade Organisation, which clashes with Trump’s unilateralism and desire for quick and visible political wins. Internal divisions are also hampering the EU’s response. Export-driven members like Germany and Ireland want a deal to protect autos and agriculture, while France and Belgium are resisting any concessions on food standards and digital taxes.
We pay more attention to GBP/USD’s downside risks this week. Following its 1.7% depreciation in the first fortnight of July, GBP/USD could extend its decline below the crucial 1.35 support level towards 1.3250, around its 100-day moving average. The OIS market is pricing an 85% chance for the Bank of England BOE to lower rates at its August 7 meeting. Last week, UK GDP growth turned negative month-on-month for a second consecutive month in May. The Atlanta Fed GDPNow model expects US advance GDP growth to rebound to an annualized 2.6% QoQ saar in 2Q25 after a 0.5% contraction in 1Q25. This week, UK CPI inflation out on July 16 could halve to 0.1% MoM in June from 0.2% in May, keeping headline inflation unchanged at 3.4% YoY. On July 17, average weekly earnings are expected to slow for a fourth straight month to 5% YoY in May from 6.1% high in December.
The JPY is bracing for volatility from Japan’s Upper House elections scheduled for July 20. Polls indicated that the Liberal Democratic Party-Komeito ruling coalition may lose its majority. On July 18, the expected decline in National CPI inflation to 3.3% YoY in June from 3.5% in May will not temper public frustration over inflation and voter fatigue over the incumbent government’s handling of economic issues.
USD/JPY has been bucking the DXY Index’s decline in June, when the Bank of Japan prioritized dampening the volatility in the JGB market by halving the bond tapering pace to JPY400 bn from FY2026-27. USD/JPY rose by 2.1% to 147.43 last week, eyeing the top of its two-month range of 142-149.
Given how the stronger-than-expected US jobs report lifted the DXY Index this month, another upside surprise in this week’s US CPI inflation could have a similar effect by dampening near-term Fed cut expectations. Fed Chair Jerome Powell has been advocating patience in lowering rates, warning that tariffs could lift inflation in the coming months. His case is reinforced by Trump’s latest threat to impose higher reciprocal tariffs on August 1 for countries that fail to strike trade deals with the US.
Quote of the Day
”The least I can do is speak out for those who cannot speak for themselves.”
Jane Goodall
July 14 in history
In 1960, Jane Goodall arrived at the Gombe Stream Reserve in present-day Tanzania to begin her study of chimpanzees in the wild.
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