EUROPEAN FX UPDATE: Contained trade as markets continue to look through Trump tariff threats

USD: DXY U/C; 97.90

• DXY has kicked the week off on a steady footing following a solid showing last week. The macro narrative remains one dominated by the trade agenda after US President Trump sent trade letters to the EU and Mexico announcing 30% tariffs from August 1st (see EUR section for more details). Despite some modest risk aversion this morning, the market remains of the view that eventual tariff rates will be notably below the currently proposed levels. Tomorrow will see attention pivot to the data slate with US CPI metrics for June on deck. Expectations are for a 0.3% M/M pick-up in core inflation with focus on any inflationary impact from the trade war. Other releases this week include PPI (combined with CPI will allow desks to model expectations for PCE) and US retail sales with the latter set to be framed around the health of the US consumer in the face of tariffs. Note, this week also sees the unofficial beginning of the Q2 US earnings season, which will provide some evidence of how corporate America is dealing with Trump's trade policies. Elsewhere, noise around Trump replacing Fed Chair Powell continues to increase with some in the administration positioning for a potential removal of Powell following renovation cost overruns at the Fed; the market continues to dismiss the possibility of such a removal. DXY briefly made its way onto a 98 handle for the first time since 25th June with a current session high @ 98.08.

EUR: EUR/USD U/C; 1.1684

• Despite a wobble in early European trade, the EUR has been resilient in the face of news that the US is to impose 30% tariffs on the EU from August 1st. Subsequently, EU Trade Commissioner Sefcovic says he will speak with US counterparts later today. However, he said the EU needs to prepare well-balanced countermeasures against the US. ING notes that there are three broad outcomes for these latest developments: 1) the latest pressure will lead to a trade agreement. 2) The US will blink. 3) Outright trade war. The market is clearly currently dismissing the risk of option 3 and is viewing the latest move as an escalate to de-escalate strategy. Given the lack of EZ data and speakers due on the docket this week, the trade agenda will likely dominate the direction of the EUR. For now, the rally in EUR/USD which took the pair to a multi-year 1.1830 multi-year peak on July 1st appears to be halted as markets await greater clarity on the outcome of trade discussions. EUR/USD hit a 1.1651 low in early European trade (lowest since 25th June). If downside resumes, there is clean air until 1.16.

JPY: USD/JPY -0.1%; 147.33

• JPY is a touch firmer vs. the USD with the yen able to benefit from a very modest safe-haven bid and stronger-than-expected machinery order data. That being said, it is not lost on markets that a trade deal between the US and Japan does not appear to be close with Japanese negotiators looking to defend Japanese interests ahead of the Upper House elections due on July 20th. The uncertainty created by the lack of progress on the trade deal has continued to undermine BoJ rate hike expectations. However, we have seen a pick-up in rate hike bets with around 16bps of BoJ tightening seen by year-end vs. circa 11bps last week. This appears to be more a by-product of increases in global bond yields, which has also impacted the Japanese rates space with the nation's 20yr hitting its highest level since 2000. USD/JPY briefly made its way onto a 146 handle. However, the session low @ 146.86 is some way off Friday's trough @ 146.13.

GBP: GBP/USD -0.1%; 1.3481

• GBP is slightly softer vs. the USD and flat vs the EUR. Sentiment for the GBP remains negative with weekend commentary from BoE Governor Bailey adding to the bearishness after stating that the MPC is prepared to make larger rate reductions if the jobs market shows signs of a pronounced slowdown. On which, in the run up to Thursday's ONS report, the latest REC survey showed "employment falling at the fastest pace since August 2023 and staff availability rising as rapidly as in late-2020", according to Pantheon Macroeconomics. If Thursday's release chimes with this data, it is likely that expectations of an August cut (priced at 85%) will be solidified. That being said, expectations of a more aggressive BoE may be tempered by inflation data due out the day before with headline Y/Y CPI expected to rise to 3.5% from 3.4% and services remain at an elevated rate of 4.6%. Cable has slipped below the 1.35 mark (coincides with the 50DMA), delving as low as 1.3452; lowest since 23rd June.

Antipodeans: AUD/USD -0.1%; 0.6572. NZD/USD --0.3%; 0.5991

• Both are softer alongside the soft risk appetite amid ongoing trade uncertainty and as participants digested Chinese trade data. After last week's RBA and RBNZ rate decisions, the sole scheduled highlight for the antipodes comes via Thursday's labour market metrics. Note, an August RBA rate cut is priced at 86% with a total of 59bps of loosening seen by year-end. AUD/USD has pulled back from Friday's YTD peak @ 0.6595, whilst NZD/USD has returned to a 0.59 handle and slipped below its 50DMA @ 0.5994.

14 Jul 2025 - 10:00- ForexData- Source: Newsquawk