The dollar rose slightly on Tuesday, but activity in the currency market remained subdued, as investors awaited any signs of progress in negotiations ahead of the August 1 deadline, which could see hefty tariffs imposed on US trade partners that fail to strike deals with Washington.

The Japanese yen held on to most of its gains from the previous session, following the results of Japan’s upper house elections held over the weekend, which came in line with expectations, easing concerns in the markets. Focus is now on how quickly Tokyo can reach a trade agreement with Washington, and on the future of Prime Minister Shigeru Ishiba’s leadership.

With just over a week left until August 1, US Treasury Secretary Scott Besant said on Monday that the US administration is more concerned with the quality of trade agreements than their timing.

When asked whether the deadline could be extended for countries engaged in constructive negotiations with Washington, Besant said President Donald Trump would be the one to make that decision.

Uncertainty over the final shape of global tariffs has paralyzed foreign exchange markets, with currencies remaining confined to tight trading ranges, even as US stocks continue to post record highs.

Thierry Wizman, global currency and interest rate strategist at Macquarie Group, said: “Nothing that happens on August 1 is necessarily permanent, as long as the US administration remains open to dialogue, as suggested in Trump’s messages two weeks ago.”

The euro slipped slightly to $1.1692. The market is also awaiting the European Central Bank meeting this week, although it is not expected to change interest rates in the eurozone.

Stalled talks between Washington and Brussels

Reaching a trade agreement between the European Union and the United States remains out of reach, as the bloc could face tariffs of up to 30% starting August 1. European diplomats said on Monday that they are considering a broader range of countermeasures as hopes for an agreement fade.

Francesco Pesole, currency strategist at ING Bank, said: “The Trump administration has shown little tolerance for retaliatory actions, and there’s a risk that matters could escalate (even if temporarily) into a tit-for-tat tariff spiral. The euro’s ability to hold its ground against the dollar amid tariff tensions will depend on the scale of escalation and whether the EU ends up worse off compared to other countries that succeed in striking deals with Washington.”

Separately, the European Central Bank said in a survey published Tuesday that demand for corporate loans in the euro area improved in the past quarter, and is expected to continue improving in the current quarter, despite tariff threats and rising geopolitical tensions.

The dollar index – which measures the performance of the US currency against a basket of currencies – rose by 0.1% to 97.91, after falling by 0.6% on Monday.

Concerns over Federal Reserve independence

Investor concerns over the independence of the US Federal Reserve also persisted, especially with Trump continuing his attacks on Fed Chair Jerome Powell and calling for his resignation over the bank’s refusal to cut interest rates.

Jonas Goltermann, deputy chief economist at Capital Economics, said: “Our base case is that strong US economic data, along with inflation boosted by tariffs, will lead the FOMC to keep interest rates unchanged until 2026, which will widen the interest rate differential in favor of the dollar and support its recovery in the coming months.”

He added with a warning: “However, that outlook remains at the mercy of White House volatility.”

The Japanese yen in focus

The Japanese yen remained in focus on Tuesday, as it slipped slightly to 147.64 yen per dollar, after rising by 1% on Monday following the elections and Japan’s public holiday.

Lee Hardman, senior currency analyst at MUFG Bank, said: “The initial relief for the yen – due to the ruling coalition not losing more seats, and Prime Minister Ishiba holding on to power – is likely to be short-lived.”

He added: “Rising political uncertainty in Japan may complicate efforts to reach a timely trade agreement with the United States, posing downside risks for the Japanese economy and the yen.”

Gold prices fell in the European market on Tuesday for the first time in the last three days, giving up a five-week high recorded earlier in Asian trading, due to active correction and profit-taking operations.

Losses are being curbed by the continued decline in US dollar levels in the foreign exchange market, as investors focus on the results of global trade talks ahead of the deadline set by US President Donald Trump on August 1.

The Price

• Gold prices today: Gold prices fell by 0.4% to ($3,383.36), from the opening level of trading at ($3,396.93), and recorded the highest level at ($3,402.78), the highest since June 16.

• Upon settlement on Monday, gold prices rose by 1.4%, in the second consecutive daily gain, thanks to the decline in US yields and the dollar.

US Dollar

The dollar index fell on Tuesday by 0.1%, continuing its losses for the third consecutive session, nearing the lowest level in two weeks at 97.70 points, reflecting the continued decline in US currency levels against a basket of major and minor currencies.

Investors are anticipating any progress in global trade talks ahead of the August 1 deadline for countries to strike deals with the US or face hefty tariffs.

Trade Developments

European Union diplomats said the bloc is considering broader retaliatory measures against the US as the likelihood of reaching a trade agreement with Washington diminishes.

Donald Trump earlier threatened to impose a 30% tariff on European imports if no agreement is reached before the August 1 deadline.

US Treasury Secretary "Scott Besant" said: imposing tariffs on August 1 “will increase the pressure” on trade partners to finalize deals.

US Interest Rates

• According to the CME Group’s FedWatch tool: pricing of the probability of a 25 basis point rate cut in the July meeting is currently stable at 3%, and pricing of keeping rates unchanged is at 97%.

• Pricing of the probability of a 25 basis point rate cut in the September meeting is currently stable at 58%, and pricing of keeping rates unchanged is at 42%.

• Focus is on the US Federal Reserve’s monetary policy meeting scheduled for next week, which is expected to provide more clues about the US interest rate path this year.

Gold Outlook

• Senior analyst at Reliance Securities “Jigar Trivedi” said: Gold prices dropped slightly amid profit-taking, but remained close to the highest level in five weeks due to ongoing uncertainty ahead of the tariff deadline on August 1.

• Trivedi added: Gold is likely to remain optimistic, with strong resistance seen near $3,420. On the other hand, $3,350 represents a support level.

SPDR Fund

Holdings of gold at SPDR Gold Trust, the world’s largest gold-backed ETF, increased yesterday by about 3.43 metric tons, bringing the total up to 947.06 metric tons, rebounding from the total of 943.63 metric tons which was the lowest since June 16.

The British pound declined at the opening of the European market on Tuesday against a basket of global currencies, giving up a two-week high against the US dollar due to active profit-taking and investor caution ahead of the Bank of England Governor's testimony.

Andrew Bailey is scheduled to testify on the Financial Stability Report before the Treasury Committee in London, and his comments are expected to provide stronger evidence regarding the path of interest rates in the United Kingdom for the remainder of this year.

The Price

• GBP/USD today: The pound fell against the dollar by 0.1% to $1.3474, from the opening level of $1.3488, after recording a high of $1.3494.

• On Monday, the pound rose by 0.6% against the dollar and hit a two-week high of $1.3511, benefiting from the decline in the US currency following less aggressive comments by a key Federal Reserve official.

UK interest rate

• Following UK labor market data released late last week, traders increased their bets on the Bank of England easing interest rates, now expecting at least an additional 50 basis points in cuts this year.

• Market pricing for a 25-basis-point rate cut by the Bank of England at the August meeting rose from 65% to 85%.

Andrew Bailey

At 10:15 GMT, Bank of England Governor Andrew Bailey is set to testify on the Financial Stability Report before the Treasury Select Committee in London.

Bailey told The Times last week that the direction of interest rates is “definitely down.” In the interview, he gave a strong signal that the Bank would accelerate rate cuts if more signs of “slack” emerge in the economy.

The term “slack” refers to a scenario in which the economy is not operating at full capacity, with higher unemployment and slowing output. This is considered disinflationary and would bolster the Bank's confidence that inflation will fall to 2.0% by 2026, as currently projected.

Pound outlook

At Economies.com, we expect that if Bailey's comments turn out less hawkish than markets anticipate, the likelihood of a rate cut in August will rise, putting further downward pressure on the pound.

The Japanese yen declined in Asian markets on Tuesday, erasing some of the strong gains it posted against the US dollar in the previous session, as investors digested the results of Japan’s upper house elections. Meanwhile, broader Japanese markets showed a muted response after reopening from Monday’s public holiday.

Last week’s inflation data out of Tokyo showed a softening in price pressures, which in turn reduced expectations for a rate hike by the Bank of Japan in July.

The Price

USD/JPY Today: The US dollar rose by 0.25% against the yen to ¥147.71, up from the session’s opening level of ¥147.37. The pair reached an intraday low of ¥147.20.

Monday Close: The yen gained nearly 1% against the dollar on Monday—its first daily gain in three sessions—after the ruling party suffered losses in the Japanese elections.

Japan’s Upper House Elections

Prime Minister Shigeru Ishiba’s Liberal Democratic Party (LDP) secured 47 seats—fewer than the 50 needed for a majority in the 248-seat upper house, in elections where half the seats were contested.

The results were not worse than expected, shifting investor attention toward Tokyo’s ability to reach a timely trade agreement with Washington and the political fate of Prime Minister Ishiba.

Markets offered only a modest reaction to the LDP’s loss, with Japanese equities showing limited movement as trading resumed after Monday’s holiday.

Analyst Commentary

Hardman, Chief FX Strategist at MUFG Bank, said: “The initial relief rally in the yen is likely to be short-lived, as the ruling coalition avoided a more severe defeat and Ishiba appears determined to hold on to power.”

He added: “However, increasing political uncertainty could complicate Japan’s efforts to finalize a trade deal with the US, posing downside risks to both the economy and the yen.”

BOJ Rate Outlook

Inflation data released on Friday showed that Japan’s core inflation slowed more than expected in June, suggesting weaker price pressures on the central bank.

As a result, market pricing for a 25-basis-point rate hike by the BOJ in July dropped from 45% to 35%.

Investors now await further data on inflation, employment, and wage growth to reassess the likelihood of future policy tightening.