Market attention on Wednesday centered on the Japanese yen, which saw sharp fluctuations as traders assessed the impact of the newly announced US-Japan trade deal and speculated over the future of Prime Minister Shigeru Ishiba.

The yen initially surged to its strongest level since July 11 at 146.20 per dollar, supported by President Donald Trump's announcement of a trade agreement with Tokyo. However, it quickly reversed into losses following reports suggesting Ishiba planned to resign next month after his party suffered a major defeat in the upper house elections.

Ishiba denied the reports, stating that claims of his resignation were “completely baseless,” which helped the yen recoup some losses and later stabilize at 146.83 per dollar.

The trade deal—which includes tariff cuts on car imports and shields Tokyo from new harsh duties—impacts the yen in two ways: its effect on the economy and on Bank of Japan policy, which has been cautiously moving toward rate hikes.

“The trade agreement opens the door for the Bank of Japan to raise rates this year,” said Jane Foley, head of FX strategy at Rabobank. “That’s positive for the yen and makes a return to 150 per dollar more difficult.”

She added, “With trade and political uncertainty lingering, it was clear the bank would not act hastily. Of course, the uncertainty isn’t over yet, which will keep the BoJ cautious—but nobody expected swift moves anyway.”

Elsewhere, movements in other currencies were limited amid persistent uncertainty over tariffs and broader skepticism on how currencies might react even if trade clarity emerges.

The US dollar has been one of the biggest losers since Trump first announced sweeping tariffs on April 2. While the weakness continued even after a temporary suspension to allow further negotiations, the pace of decline has slowed this month.

The euro slipped 0.1% to $1.1744, still near its four-year high reached earlier this month. Meanwhile, the British pound edged up slightly to $1.1354.

In contrast to the euro’s performance, European equities climbed on hopes the Japan deal could pave the way for further trade agreements, including one with the European Union.

Trump announced that EU negotiators would arrive in Washington on Wednesday.

The European Central Bank is expected to meet on Thursday, though it is unlikely to have a major impact on the currency, as interest rates are expected to remain unchanged.

Improved sentiment toward the global economy following the trade deal, along with rising metal prices, also supported the Australian dollar, which rose 0.4% to $0.6581, despite ongoing market caution.

As of 11:57 GMT, the US dollar index rose 0.1% to 97.4 points, with a high of 97.5 and a low of 97.3 points.

Gold prices declined in European trading on Wednesday, marking their first loss in four sessions. The pullback comes after the metal hit a five-week high earlier in Asian trading, as profit-taking and improved market risk appetite weighed on the precious metal following a major trade agreement between the US and Japan.

The US dollar also began rebounding from a two-week low, as recession concerns eased ahead of further trade updates expected before the August 1 deadline.

The Price

Gold prices dropped 0.45% to $3,416.52 an ounce, down from the session’s open at $3,431.44, after reaching an earlier high of $3,438.94 — the highest since June 16.

On Tuesday, gold settled with a 1.0% gain, its third consecutive daily increase, supported by lower US yields and a weaker dollar.

US Dollar

The US Dollar Index rose about 0.2% on Wednesday, attempting to recover from a two-week low of 97.31. It’s on track for its first gain in four sessions, reflecting a broad-based rebound in the greenback.

Beyond bargain buying, the dollar’s strength was boosted by a significant US-Japan trade deal that helped ease recession fears in the world’s largest economy.

Trade Developments

President Donald Trump announced on Tuesday a “massive” trade agreement with Japan, which includes reciprocal 15% tariffs on Japanese exports to the US and a reduction in auto tariffs from 25% to 15%.

Treasury Secretary Scott Besant also stated that US and Chinese officials would meet next week in Stockholm to discuss a possible extension of the trade negotiation deadline to August 12.

US Interest Rates

Trump continued his attacks on Fed Chair Jerome Powell, calling him a “fool” for keeping interest rates “too high” and claimed Powell would step down in eight months.

According to the CME FedWatch Tool, there’s currently a 5% chance of a 25-basis-point rate cut at the July meeting, and a 95% probability of rates remaining unchanged.

For September, markets are pricing in a 59% chance of a rate cut and a 41% chance of no change.

The upcoming Fed policy meeting next week is expected to offer more clarity on the rate path for the remainder of the year.

Gold Outlook

Tim Waterer, Chief Market Analyst at KCM Trade, said more trade agreements before August 1 could boost overall risk appetite and reduce demand for gold.

He added that if the US dollar remains under pressure, gold has a realistic chance of retesting the $3,500 level in the near term.

Matt Simpson of City Index noted that current conditions suggest low liquidity, and a decline in political pressure on Powell could reduce volatility, potentially giving bears an opportunity to target moves below $3,500.

SPDR Gold Trust

Holdings in the SPDR Gold Trust — the world’s largest gold-backed ETF — rose by 7.74 metric tons yesterday, marking the biggest daily increase since April 10. Total holdings now stand at 954.80 metric tons, the highest since June 27.

The euro declined in European markets on Wednesday against a basket of global currencies, retreating from a two-week high versus the US dollar. The currency is on track for its first loss in four sessions, driven by profit-taking and a rebound in the US dollar following a major trade deal between the US and Japan.

Later today, markets await the start of the European Central Bank’s (ECB) highly anticipated monetary policy meeting, with expectations pointing to an unchanged interest rate. Traders are looking for clues on whether the ECB may resume its easing cycle later this year.

The Price

EUR/USD slipped by 0.2% to $1.1731, down from an opening price of $1.1754, after hitting a session high of $1.1756.

On Tuesday, the euro climbed 0.55% against the dollar, marking its third consecutive daily gain and reaching a two-week peak at $1.1761 on rising odds of a US rate cut in September.

US Dollar

The US Dollar Index rose by 0.15% on Wednesday, attempting to rebound from a two-week low of 97.31 points. It is on course to log its first gain in four sessions, reflecting a modest recovery in the greenback against major currencies.

Beyond technical buying at lower levels, the dollar's rebound was supported by a significant trade deal between the US and Japan, which eased concerns over a potential recession in the world's largest economy.

On Tuesday, President Donald Trump announced a "massive" trade agreement with Japan, including reciprocal tariffs of 15% on Japanese exports to the US and a reduction in tariffs on Japanese vehicles from 25% to 15%.

European Central Bank

The ECB meets today and tomorrow to evaluate its monetary policy stance amid recent economic developments across the eurozone.

The bank is widely expected to keep its key interest rate unchanged at 2.15%, the lowest level since October 2022.

Markets are closely watching for signs of further easing and potential rate cuts later this year.

Eurozone Rates Outlook

According to Reuters sources, a clear majority at the last ECB meeting favored leaving rates unchanged in July, with some members calling for a longer pause.

Money markets currently price in a 30% chance of a 25 basis-point ECB rate cut in July.

The Japanese yen declined in Asian markets on Wednesday against a basket of major and minor currencies, pulling back from a two-week high against the US dollar recorded earlier in the session. This marked its first loss in three days amid active profit-taking and corrective movements.

The decline followed the announcement of a major trade agreement between Tokyo and Washington, which includes US tariff reductions on Japanese imports and a commitment by Japan to invest approximately $550 billion in the United States.

The Price

USD/JPY rose 0.4% to ¥147.20, up from an opening rate of ¥146.59, after hitting a session low of ¥146.19 — the weakest level since July 11.

On Tuesday, the yen gained 0.55% against the dollar, posting its second consecutive daily gain amid falling yields on 10-year US Treasury bonds.

Major Trade Agreement

President Donald Trump announced Tuesday the signing of a “massive” trade agreement with Japan, including reciprocal tariffs of 15% on Japanese exports to the US and a reduction of tariffs on Japanese cars to 15%, down from the current 25%.

In a post on Truth Social, Trump described the deal as “perhaps the biggest ever,” noting that Japan will inject $550 billion in investments into the United States, with America set to earn 90% of the profits.

Trump added that the agreement will open Japanese markets to American goods, including cars, trucks, rice, and other agricultural products, claiming it will create “hundreds of thousands of jobs.”

Japanese Prime Minister Shigeru Ishiba stated that US tariffs on Japanese vehicles would be reduced from 25% to 15% — a significant step, given that the auto sector forms the backbone of Japanese exports to the US, accounting for 28.3% of total shipments in 2024, according to customs data.

Japan’s auto exports (including cars, buses, and trucks) to the US dropped by 26.7% in June, following a 24.7% decline in May.

Total Japanese exports to the US — its second-largest trading partner — amounted to ¥10.3 trillion ($70.34 billion) between January and June, a 0.8% year-over-year decrease.

Ishiba’s Political Future

Tuesday’s announcement comes just days after Prime Minister Ishiba’s ruling coalition lost its majority in the Japanese Upper House elections, raising concerns about weakened leverage in U.S. negotiations.

According to HSBC, a favorable trade deal with the U.S. could help Ishiba fend off a no-confidence vote or internal challenges from within the Liberal Democratic Party.

While Ishiba declared his intention to remain prime minister after the electoral loss, Japanese media outlet Yomiuri reported early Wednesday that he would decide whether to stay in office based on the progress of tariff negotiations.

Japanese Interest Rates

Last week’s data showed core inflation in Japan slowed more than expected in June, suggesting weakening price pressures on the Bank of Japan.

Following the release, market expectations for a 25 basis-point rate hike at the BoJ’s July meeting dropped from 45% to 35%.

Investors now await more data on inflation, unemployment, and wages to reassess these odds.