The US dollar is showing mixed results in early North American trading after a new trade deal with Japan. The USDJPY increased but fell back after a 15% tariff on Japanese goods was announced. Meanwhile, the EURUSD and GBPUSD are seeing varied movements.

US-Japan Trade Deal Details

The US-Japan trade deal sets a 15% tariff on Japanese cars. This gives Japan an edge compared to countries facing a higher 25% tariff. In return, Japan will open its markets for US products and invest $550 billion in the US, allowing the US to keep 90% of profits. Japan also agrees to import more US rice while claiming its agriculture won’t suffer. The deal prevents a 25% tariff on cars and boosts Japan’s competitiveness. However, discussions about tariffs on Japanese steel are ongoing. US Treasury Secretary Bessent mentioned progress in trade talks with the EU and expressed confidence in dialogue with China. He described Japan’s deal as “innovative,” aiming to strengthen economic resilience. EU Trade Commissioner Šefčovič is set to meet with US officials to discuss issues, preparing for possible retaliatory actions while looking for a resolution. Bank of Japan (BoJ) Deputy Governor Uchida noted economic challenges and the need for a loose monetary policy, especially with speculation about a rate hike by year-end triggered by the trade deal. European stocks gained as market sentiment improved due to the trade agreement. US stock indices also show gains, with debt yields remaining stable: 2-year at 3.839%, 5-year at 3.893%, 10-year at 4.355%, and 30-year at 4.99%.

Market Reactions and Predictions

Crude oil is down to $64.85, gold to $3,425, and Bitcoin to $118,618. Alphabet is expected to release earnings later today. There’s a noticeable gap between market expectations and the guidance from central banks regarding the Japanese yen. Traders anticipate a rate hike following the trade deal; however, Uchida’s comments indicate caution. Recent data shows Japan’s core inflation has been above the central bank’s 2% target for over a year, which supports the market’s bullish stance and could lead to high volatility in USD/JPY. The euro seems weaker, as Bessent’s comments suggest the favorable tariff arrangement for Japan may not apply to the EU. This, along with the EU’s preparation for retaliatory measures, suggests ongoing trade tensions. Given the Eurozone’s recent mixed economic performance, especially in manufacturing, we expect EUR/USD may trend lower in the coming weeks. We believe the pound may gain strength against other currencies. The UK is dealing with more persistent inflation, with April’s CPI at 2.3%, prompting its central bank to consider a “higher for longer” interest rate policy. Historically, a more aggressive Bank of England compared to the US Federal Reserve tends to support the GBP/USD exchange rate. The positive market response to the trade deal indicates lower overall anxiety. Historically, resolving major trade uncertainties, similar to the US-China Phase One deal in late 2019, has reduced the VIX volatility index. We expect a similar trend now, making strategies that profit from falling volatility, such as selling out-of-the-money options, increasingly appealing. US Treasury yields are stable, suggesting the bond market believes this news won’t alter the Federal Reserve’s immediate policy direction. According to the CME FedWatch Tool, traders still anticipate one to two rate cuts by year-end, depending on softer inflation and job data. Any changes in this expectation from upcoming economic reports could significantly impact yields. Create your live VT Markets account and start trading now.

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