EUROPEAN FX UPDATE: USD extends its recent recovery, EUR await Trump tariff letter

USD: DXY +0.2%; 97.74

• DXY has kicked the session off on the front foot with the USD once again resilient to hostile trade updates. To recap, US President Trump announced a 35% tariff for Canada and flagged a potential 20% blanket tariff for other countries. Performance of the USD stands in contrast to the moves seen in April (higher trade tensions = lower USD) with price action likely a by-product of markets continuing to call Trump's bluff on the eventual severity of tariffs and the market over-extended to the downside on the USD. The next scheduled inflection point for the dollar will likely be provided by next week's US inflation metrics. Consensus looks for a 0.3% M/M outturn for core CPI, which, if realised, would underscore the lack of feasibility of the Fed acting in the near-term (particularly in the context of the resilient labour market), despite inevitable pressure from the Trump administration to do so. As it stands, a September cut is priced at 68% with a total of 50bps of loosening seen by year-end. DXY is currently contained within yesterday's 97.27-97.92 range.

EUR: EUR/USD -0.1%; 1.1689

• EUR/USD has continued its descent and has returned to a 1.16 handle alongside a broader pick-up in the USD. Focus in the Eurozone is on an expected imminent announcement by the Trump administration after the President stated that the EU will receive a letter notifying them of new tariff rates by Friday. It remains to be seen how this plays out given that the EU appears to be operating under the assumption that the negotiating deadline with the US has shifted to August 1st. As such, any threats of tariffs, may end up falling under the umbrella of the latest 20% blanket tariff figure quoted by Trump. However, this will likely be seen as more of a negotiating tactic by the Trump administration and not represent a final state of affairs. As such, the impact on the EUR may prove to be limited. ECB's Schnabel has been on the wires, noting that the bar to another ECB rate cut is high. However, given the 1.6% 2026 inflation forecast by the ECB, this is unlikely to be a majority view on the governing council, particularly given ongoing concerns over the strengthening EUR. EUR/USD has delved as low as 1.1666 but is currently holding above yesterday's MTD trough @ 1.1662.

JPY: USD/JPY +0.4%; 146.89

• JPY is once again lower vs. the USD in what has been a bruising week for the JPY. Downside for the Yen has primarily been a by-product of the ongoing lack of progress for Japan in striking a trade deal with the US. This sentiment has also been underscored by Trump's latest tariff salvo in which he also flagged a potential 20% blanket tariff for "other countries". The main sticking point remains the Japanese desire to obtain concessions for its precious auto sector with the government unwilling to cede much ground ahead of upcoming upper house elections due July 20th. The prolonged uncertainty is also having a dampening effect on the BoJ's rate hiking ambitions (previously a source of support for JPY) with just 11bps of tightening seen by year-end. USD/JPY briefly made its way onto a 147 handle with an overnight peak @ 147.18. If upside resumes, there's clean air until 148.

GBP: GBP/USD -0.3%; 1.3539

• GBP remains on the backfoot after this week's sole UK data highlight proved to be a disappointment. M/M GDP for May showed an unexpected contraction of 0.1% and followed the 0.3% decline in April. Markets often view the M/M prints as a volatile data series. However, two soft prints in a row have underscored the clear pullback from the encouraging growth levels seen in Q1. The market has an outsized sensitivity to the growth picture given its implications for OBR forecasts and subsequent headroom for Chancellor Reeves. Clearly today's release adds pressure on the Chancellor, who has very limited options at her disposal given the already-announced hefty spending cuts, her restrictive fiscal rules and pledges to not impose taxes directly on working people. As such, expectations are mounting that the BoE will need to cut rates at a more aggressive pace. However, next week's UK CPI report could underscore the difficult position for the MPC with Y/Y CPI expected to rise to 3.5% from 3.4%. Cable hit a session low @ 1.3532 but failed to breach the WTD trough printed on Tuesday @ 1.3524.

Antipodeans: AUD/USD -0.1%; 0.6579. NZD/USD -0.3%; 0.6016

• Both weaker vs. the broadly firmer USD and suppressed by the soft risk tone. Domestic drivers are lacking for both currencies after RBA and RBNZ rate decisions earlier in the week. As such, performance of the greenback will likely continue to offer trade direction in the near-term. AUD/USD hit a fresh YTD high overnight @ 0.6595 before fading upside. Note iron ore prices in Asia also surged. NZD/USD is weaker but still managing to hold above the 0.60 mark.

11 Jul 2025 - 09:55- ForexData- Source: Newsquawk