EUROPEAN FX UPDATE: DXY picks up and EUR pulls back as participants digest the EU-US trade deal

USD: DXY +0.5%; 98.05

• The USD picked up strength in early European trade after a steady APAC session. There was no headline coinciding with the move at the time but it appeared to be more a case of Europe reacting to events over the weekend (see EUR section for details). The EU-US agreement removes another area of uncertainty for the market and could also be followed by some positive mood music between the US and China with both sides set to meet in Stockholm this afternoon. Reporting ahead of the meeting suggests a potential 90-day extension of the current 90-day truce. Elsewhere on the trade front, the August 1st deal looms large. However, given progress with the EU and potentially China, the date has lessened in importance. Nations to watch ahead of Friday include, India, South Korea, Mexico and Canada. Wednesday sees the latest FOMC policy announcement, which is very much expected to see policymakers retain their wait-and-see approach. As such, greater emphasis will likely be on the data slate with Friday's NFP report the main highlight. Other tier 1 releases include JOLTS, ADP, US Q2 GDP and core PCE. As it stands, odds of a September cut are at 68% with a total of 44bps of loosening seen by year-end. Note, month-end models are indicative of mild USD selling. DXY has made its way back onto a 98 handle with a current session high @ 98.06. Next upside target comes via the 50DMA @ 98.30.

EUR: EUR/USD -0.5%; 1.1685

• The obvious focus for the Eurozone at the start of the week has been on the trade front following the EU-US trade agreement. The deal will see EU goods subject to a 15% tariff (including autos, semiconductors, pharma), 0% tariff on aircraft parts (for now), make USD 750bln in energy purchases from the US and USD 600bln in US investments. The deal is broadly as expected following reporting last week and is not "as bad as feared" given the 30% tariff rate, which was looming over negotiations. However, EUR has been unable to capitalise on the removal of uncertainty and is softer vs. the USD and EUR. Part of this may be a "buy the rumour, sell the fact" trade and also the view that, whilst the worst case has been avoided, it is still a sub-optimal trade arrangement for the EU. It is also worth noting that at this stage, it is just an agreement and still subject to formal ratification by both sides. From a policy perspective, the deal will remove some uncertainty for the ECB and the downside growth risks dampened. As such, unless the EUR is to materially strengthen further, rate cut bets are likely to be trimmed; subject to data. On which, this week's docket includes flash GDP data for Q2 and HICP metrics for July. EUR/USD has slipped onto a 1.16 handle with a session low @ 1.1672. Next target comes via the 21st July low @ 1.1614.

JPY: USD/JPY +0.4%; 148.24

• JPY is also suffering at the hands of the firmer USD with USD/JPY back above the 148 mark. Sentiment in Japan remains suppressed by political headwinds with Japan's ruling LDP said to have collected enough signatures on Friday to call a general meeting that will hold PM Ishiba accountable for the party's recent crushing election loss. Participants are also bracing for this week's BoJ policy announcement, which is expected to see policy settings left unchanged. As such, focus will be on the accompanying statement, which analysts expect to see the BoJ providing a less gloomy view and signalling the potential for resuming rate hikes later in the year, following the US-Japan trade agreement last week. As it stands, markets price around 19bps of tightening by year-end. USD/JPY has ventured as high as 148.34 with the next upside target coming via the 21st July high @ 148.66.

GBP: GBP/USD -0.1%; 1.3420

• GBP is softer vs. the USD but to a lesser extent than peers with the pound benefiting from cross-related selling in EUR/GBP. Macro drivers for the UK are light aside from UK PM Starmer being set to meet US President Trump for wide-ranging talks in Scotland; expected to discuss progress on implementing the UK-US trade deal. The data slate is a light one for the UK this week. As such, given the busy US data docket, the USD will likely provide the near-term direction for the pair. Cable is just about holding above the 1.34 mark with a session low @ 1.3407. EUR/GBP is eyeing a test of 0.87 to the downside with a current session low @ 0.8705.

Antipodeans: AUD/USD -0.7%; 0.6521. NZD/USD -0.6%; 0.5976

• Both softer vs. the USD and towards the bottom of the G10 leaderboard despite the favourable risk environment and hopes of a 90-day extension of the current 90-day truce between the US and China. Macro drivers for both remain light with AUD looking ahead to CPI metrics on Wednesday. Markets currently price an RBA rate cut next week @ 85%. AUD/USD has pulled back further from last week's YTD high @ 0.6625 and delved as low as 0.6516. The next support level comes via the 50DMA @ 0.6510. NZD/USD has retreated onto a 0.59 handle with a session low @ 0.5969.

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