Market sentiment is slightly positive early Wednesday as traders welcome the US-Japan trade deal after much drama. President Trump also announced near-final trade agreements with Indonesia and the Philippines.
However, Canadian Prime Minister Carney said he will seek a deal with the US that benefits Canadians, hinting at a long process amid recent tensions after Trump’s tariff letters.
EU-China trade talks face hurdles after China raised concerns about EU sanctions on Chinese firms. Meanwhile, EU Trade Commissioner Maros Sefcovic called this week’s EU-China summit a key chance to discuss trade.
US Commerce Secretary Lutnick praised AstraZeneca’s $50 billion plan to build a manufacturing facility in the US as “another win for American manufacturing.”
Fed independence discussions intensified after Trump hinted Fed Chair Jerome Powell could be replaced soon, despite stating he wouldn’t say Powell will be fired. Former Fed Chair and Treasury Secretary Janet Yellen reaffirmed strong belief in the Fed’s independence. Both Powell and Fed Governor Bowman spoke, respecting the pre-FOMC blackout and avoiding economic or policy comments. Bowman emphasized the importance of Fed independence in monetary policy.
Trump hailed the US-Japan trade deal as “the largest ever,” highlighting 15% tariffs on cars, increased Japanese rice purchases from the US, and $500 billion Japanese investment in America. Japan’s Prime Minister Ishiba confirmed the deal but withheld comment on its impact on the major Asian economy, saying he needs to analyze it first. Japan’s top tariff negotiator, Ryosei Akazawa, tweeted: “Mission Accomplished.” However, the top three US automakers publicly opposed the deal.
Global rating agency Moody’s expressed concern over the Japan deal following Ishiba’s party losing its majority in both houses, suggesting political impacts may be more immediate. Reports also suggest that Ishiba may step down by the end of August.
Bank of Japan Deputy Governor Shinichi Uchida gave a cautious economic outlook, warning of downside risks to growth and inflation due to “extremely high” global trade uncertainty. Bloomberg noted fresh USD/JPY carry trade opportunities after the trade deal, BoJ’s resistance to raising rates, and the Fed’s resistance to cutting rates.
Australia’s six-month annualized growth rate, measured by the Westpac-Melbourne Institute Leading Index, slowed to 0.03% in June from 0.11% in May.
No major data releases influenced markets, which mainly reacted to trade deal news and Fed independence debates. Trump’s pressure on Russia, by supporting Ukraine, and threats to strike Iran if Tehran enriches uranium further affected sentiment.
The US Richmond Fed Manufacturing Index for July fell sharply to -20.0, the lowest since September 2024, well below the expected -3.0 and the revised -8.0 prior reading.
This cautious optimism around US trade deals and political pressure on the Fed weighed on the US Dollar Index (DXY), which dropped to its lowest level in nearly two weeks after three consecutive days of decline. The DXY’s slide trimmed the first monthly gains in six months, allowing gold, major currencies, and Antipodean currencies to stay firm. Cryptocurrencies rose slightly before pulling back, equities consolidated, and crude oil ignored a surprise draw in weekly inventories and fresh Iranian challenges, falling to a three-week low. Bond yields edged lower overall, but Japanese yields spiked early Wednesday due to the trade deal, helping USD/JPY end its two-day losing streak.
The US Dollar’s rebound lost steam early Wednesday, breaking a three-day winning streak as markets turn cautious ahead of Thursday’s European Central Bank (ECB) monetary policy decision and amid rising EU-China trade tensions.
GBP/USD holds near its two-week high after two days of gains but remains indecisive.
Meanwhile, USD/JPY took the spotlight by snapping a two-day losing streak, despite mixed signals from Japan—including cautious comments from Bank of Japan (BoJ) official Shinichi Uchida, speculation about Prime Minister Ishiba’s resignation, and no clear winner in the US-Japan trade deal. A fresh carry trade opportunity in USD/JPY also supported the move.
Even as the US Dollar Index halts its three-day losing streak, AUDUSD and NZDUSD climbed for the fourth straight session, hitting fresh weekly highs. Meanwhile, USDCAD fell for the fourth consecutive day, reaching its lowest level in over two weeks.
Notably, weak June data from Australia’s Westpac Leading Index, ongoing US-Canada trade tensions, and falling crude oil prices—Canada’s key export—did little to slow AUDUSD buyers or stop USDCAD sellers.
WTI crude oil remained weak despite a surprise draw of -0.5777 million barrels in the API Weekly US Crude Oil Inventories (vs. a prior draw of 19.1 million). It dropped to its lowest level in three weeks before seeing a corrective bounce early Wednesday.
The drop ignored escalating US-Iran tensions and fears over the Ukraine-Russia conflict, as well as concerns about OPEC+ output increases and reduced energy demand due to tariff issues. Additionally, the absence of news impacting the global oil supply chain contributed to the weakness, trimming oil's third consecutive monthly gain ahead of the official US oil inventory data from the Energy Information Administration (EIA), expected at -1.4M (prior: -3.9M).
Gold ended its three-day winning streak, while leading cryptocurrencies like Bitcoin (BTCUSD) and Ethereum (ETHUSD) trimmed weekly gains. The pullback comes amid a corrective bounce in the US Dollar and month-end consolidation driven by mixed market sentiment.
Notably, concerns over Federal Reserve independence and caution ahead of both the Federal Open Market Committee (FOMC) and European Central Bank (ECB) meetings contrast with strong institutional demand, keeping traders engaged.
Wednesday’s economic calendar includes the EU Consumer Confidence data for July, US Existing Home Sales, and weekly crude oil inventories. Despite the lighter data, markets are set for an active day, driven by reactions to strong earnings from Google’s parent Alphabet and the US-Japan trade deal.
Pressure on politicians to stay out of the Fed’s affairs and mixed reactions to US trade deals with major economies will also be key. Trump’s political stance on Russia and Iran may further influence sentiment and test market optimism, potentially helping the US Dollar maintain its corrective bounce.
Crude oil remains under pressure, unless an expected inventory draw surprises the markets. Meanwhile, USDJPY may pull back from recent gains, but the Antipodeans, cryptocurrencies, and gold could see further upside. EURUSD and GBPUSD may experience mixed reactions.
May the trading luck be with you!
