U.S. markets kicked off the week on a strong note, with futures on the S&P 500 and Nasdaq climbing sharply, supported by a surprise trade agreement between the United States and the European Union, along with growing expectations for an extension of the tariff truce with China. These developments helped ease some of the anxiety that had weighed on markets in recent weeks, offering investors renewed confidence to buy into equities, especially following last week’s record-high closes.
The U.S.-EU agreement includes a 15% tariff on European goods a significant pullback from the previously announced 30% slated for early next month. In return, Brussels committed to injecting $600 billion in investments into the U.S. economy and increasing imports of American energy and military equipment. This deal follows a similar agreement reached with Japan last week, worth $550 billion, involving identical tariffs on Japanese auto exports.
On the U.S.-China front, a third round of trade negotiations kicked off in Sweden, with a focus on long term structural issues such as technology transfers and China’s industrial surplus. Leaks suggest both sides are considering a 90-day extension of the current tariff truce, which would allow negotiations to continue without an immediate escalation. While temporary, this extension provides breathing room for global markets in the midst of broad macroeconomic volatility.
This week, markets will closely monitor a series of key economic data, led by Q2 U.S. GDP figures and the Core PCE Index the Federal Reserve’s preferred inflation gauge. Should the data show economic resilience and rising inflationary pressure, the Fed may lean toward maintaining its cautious stance on rate cuts, which would directly influence high-risk assets and major currencies.
In parallel, the U.S. Dollar Index rose 0.4% to 97.815, supported by easing trade tensions and reduced expectations of imminent rate cuts from the Fed. Technically, holding the 97.50 support level strengthens the case for a near-term test of 98.20, particularly if growth and inflation data remain robust. Despite the uptick, the dollar index is still on a downward weekly trend, reflecting ongoing structural pressures on the U.S. currency.
The euro fell to 1.1688 against the dollar, pulling back from its highest level in four years. The drop is attributed to a lack of strong European catalysts and a relatively higher funding cost versus the dollar (2% annually). Technically, a break below the 1.1700 level signals potential downside toward 1.1600 especially if the Fed maintains a hawkish tone, as widely expected.
The British pound declined to 1.3409, pressured by concerns over a potential recession and expected tax hikes this fall. These headwinds make sterling vulnerable to breaking its 1.3370 support level, which could open the door for a further slide toward 1.3150, particularly if Fed commentary supports a stronger dollar. Meanwhile, the Japanese yen fell 0.4% to 148.25 against the greenback, despite signs of improvement in trade ties between Tokyo and Washington.
Japanese markets are clouded by political uncertainty following the ruling coalition’s loss in the upper house elections and speculation over a possible resignation of the prime minister. These developments are weighing on investor sentiment, even though the Bank of Japan is widely expected to keep its policy unchanged this Thursday. Elsewhere, the Australian dollar surrendered recent gains, retreating to 0.6521, while the Chinese yuan remained under pressure as the dollar climbed to 7.1738 amid signs of domestic slowdown and persistent trade tensions.
Conclusion:
Markets are currently enjoying a temporary reprieve driven by recent trade deals, but this stability remains fragile. Much will depend on the direction of U.S. monetary policy and the success of negotiations with China. In the absence of comprehensive agreements, investor sentiment remains vulnerable to sharp shifts. At this juncture, a data-driven approach with close attention to key support and resistance levels in equities and currencies is essential.
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