Dollar on the defensive, seeks support 

Dollar struggles persist 

Despite the current sideways trading relative to the euro, the dollar appears to be on course to record a negative week and give back a sizeable chunk of its early July gains. Notably, both risk-on and safe haven currencies are outperforming the greenback this week, with dollar/yen falling by around 1%. Despite the political unrest after last weekend’s poor election result achieved by the incumbent Japanese government, and today’s softer Tokyo CPI report, a small boost in BoJ rate hike expectations appears to be supporting the yen.

This dollar weakness comes amidst a positive week for risk appetite, with the S&P 500 index being up 1.1% this week, mostly due to ongoing robust earnings results. Impressively, the Nikkei 225 index is currently gaining 5%, capitalizing on this week’s US-Japan agreement, which is the strongest weekly rally since mid-August 2024. On the flip side, gold has quickly given back this week’s gains, dropping to the $3,355 area, while silver posted a new 14-year high.

Meanwhile, the crypto space is currently surrendering a small portion of this week’s impressive gains. At the time of writing, bitcoin is hovering around 115k - a two-week low - and ether is trying to remain above this week’s trough of $3,560. Nevertheless, altcoins have been making exceptional gains this month, clearly outperforming the king of cryptos, boosted by the recent stablecoins act.

ECB pauses, September cut becomes less likely 

Thursday’s ECB meeting was an appetizer for next week’s eventful calendar, which includes Wednesday’s FOMC meeting, Friday’s critical US jobs data and key tech earnings releases. Contrary to investment banks’ forecasts, President Lagarde appeared slightly more optimistic about the growth outlook and the easing inflationary pressures. The ECB has finally joined the Fed in adopting a “wait-and-see” approach. However, compared to the US, Lagarde et al. have cut rates eight times since June 2024, tackling disinflation and preparing the ground for a potential trade war, with euro traders rewarding the ECB’s decisiveness and swift actions.

The market is currently pricing in just 15bps of additional easing in 2025, a level that could quickly increase if there is no trade agreement between the US and the EU over the summer. The August 1 expiration of the pause on reciprocal tariffs is fast approaching, and negotiations are expected to pick up over the weekend.

Trump visits the Fed 

US President Trump appeared upbeat about a US-EU deal, possibly similar to the US-Japan agreement, although Europeans seem less inclined to accept Trump’s terms compared to the beleaguered Japanese Prime Minister. At this stage, a skeleton US-EU agreement is more likely than a full-blown trade war, particularly as the US administration wants to shift its focus to China.

While there is a framework agreement in place between the US and China, Trump is pushing for the next step in the form of a more comprehensive and detailed deal, opening up the Chinese market for US products. Contrary to the market's reaction over the past two weeks, investors are going to be on their toes regarding a potential disagreement between the two world economic superpowers, which would have wider economic ramifications.

Interestingly, during his visit to the Fed, Trump did not comment about China, nor did he repeat the usual name-calling of Fed Chair Powell. When asked about firing Powell, the US President responded: “to do that is a big move, and I don’t think that’s necessary”. This could be a signal that the pressure on Powell to cut rates or even resign might ease over the summer, or at least until the late-August Jackson Hole Symposium. However, this newly found calmness will probably be put to the test next week, when the FOMC is not expected to deliver a rate cut, quite likely angering Trump and scaring dollar investors once again.