The EURUSD trades just below a recent peak as the European Central Bank prepares to announce its policy decision. The Bank’s financing rate has been cut from 4.5% to 2.15% over eight meetings. The GBPUSD falls due to disappointing Service PMI data, although its Manufacturing PMI slightly beats forecasts. The USDJPY rises following a dip in the Asian session, supported by buyers at the 50% midpoint.
Recent Trade Developments
Recent trade developments involve a U.S. and Japan deal, leading U.S. attention back to China and the EU. President Trump plans to impose tariffs between 15% and 50% on many countries unless they open markets to U.S. businesses, with ongoing talks with China and the EU on various trade issues. The EU is engaged in negotiations with the U.S., aiming for a resolution without introducing countermeasures before August 1st.
The Reserve Bank of Australia has kept its rate steady at 3.85%, despite a possible 25-basis point cut. The board will wait for more evidence of reduced inflation, noting external risks from U.S. tariffs. Reserve Bank of Australia’s Governor spoke of needing more data before deciding on further rate cuts, stressing a balanced labour market despite recent inflation data.
The PMI data across Europe shows varied results, with differences noted between manufacturing and services sectors. France and Germany both noted movements close to forecasts, while the Eurozone exceeded expectations. In the UK, Manufacturing PMI beat forecasts, but Services PMI significantly missed. In Asia, Japan’s PMI data shows a stable service sector and contracting manufacturing. Australia’s data reflects improvements in all PMIs.
In financial markets, U.S. stocks are varied with the Dow down, while NASDAQ and S&P see gains. Europe reflects mixed indexes, with Spain’s Ibex notably up, while Italy’s FTSE MIB falls. U.S. yields rise across maturities, with increases in all treasury yields noted. In commodities, crude oil is up, gold experiences a downturn, and Bitcoin remains steady.
Market Outlook
Given the European Central Bank is expected to hold rates, we believe the EURUSD’s recent strength is fragile and presents a potential selling opportunity. The mixed PMI data, with German manufacturing still weak, does not provide a strong foundation for a continued rally. We should prepare for volatility and consider bearish positions if the ECB’s forward guidance is dovish.
The former president’s talk of broad tariffs will likely keep the US dollar supported as a safe-haven asset amid global trade uncertainty. Recent headlines confirm that US officials are still actively reviewing tariffs on over $300 billion of Chinese goods, which keeps risk aversion high. This backdrop favors holding long dollar positions against currencies with more economic headwinds.
We see the British pound as particularly vulnerable following the significant miss in its Services PMI data, which is a critical sector for the UK economy. This fundamental weakness is underscored by the latest Office for National Statistics report showing an unexpected 0.5% drop in monthly retail sales. Consequently, we should be looking for opportunities to short the GBPUSD pair or buy put options.
The Reserve Bank of Australia’s decision to hold its cash rate, backed by Ms. Bullock’s cautious commentary, makes the Australian dollar appear resilient. Australia’s latest quarterly inflation data came in at 3.8%, well above the central bank’s target, justifying the hawkish stance and strong local PMIs. This makes the AUD a favorable currency to own against those with weakening fundamentals, such as the pound.
With Japan’s manufacturing sector falling back into contraction, we anticipate the yen will remain under pressure, especially against the dollar. The USDJPY pair bounced from a key technical level, indicating that buyers are defending dips and supporting a move higher. We see this as an opportune time to implement strategies that benefit from a rising exchange rate.
The increase in US Treasury yields makes the dollar more attractive and simultaneously pressures non-yielding assets. Gold’s sharp fall is a direct reflection of this dynamic, as a stronger dollar and higher interest rates make holding the metal more expensive. We expect this environment to remain challenging for precious metal bulls in the coming weeks.
