In a week dominated by aggressive trade moves and central bank drama, the global financial landscape finds itself at a delicate crossroads. The Bank of Japan held interest rates steady at its July meeting, signaling a cautious approach toward inflation and growth, even as Governor Kazuo Ueda revised the core CPI forecast upward for fiscal 2025. Despite modest optimism over the Japan-US trade deal easing uncertainty, Ueda offered no strong signal for immediate policy tightening, leaving the Japanese Yen vulnerable. Investors took note, driving the yen to a four-month low against the dollar. Japan’s manufacturing sector also contracted in July, with PMI falling below 50 again, although a six-month high in business confidence softened the blow. However, hopes for a BoJ rate hike are tempered by political shifts after the Liberal Democratic Party’s recent electoral setback. Master the markets with expert-led trading courses from MJFXM — your path to smarter investing starts here.
Meanwhile, the US Dollar surged to a multi-month high amid fading expectations for a Fed rate cut in September. Fed Chair Jerome Powell dismissed the idea of near-term easing, citing solid economic performance and a still-low unemployment rate. Recent data backs his stance—Q2 GDP expanded by 3%, and PCE inflation rose more than expected. Core PCE climbed to 2.8%, fueling speculation that the Fed will hold off on cuts until at least October. Yet not all Fed voices are aligned; dissent from Governors Michelle Bowman and Christopher Waller marked a rare public split, with both advocating for immediate rate cuts. Their concerns center on the lagged impact of tariffs and signs of labor market stress, raising questions about internal cohesion at the Fed.
Amid this monetary tug-of-war, President Donald Trump launched a sweeping tariff offensive. In a barrage of executive orders, Trump slapped new trade levies on over a dozen countries. Tariffs range from 10% on UK goods to 41% on Syrian exports, with other notable targets including India (25%), Switzerland (39%), and Canada (35%). Trump’s stated goal: “reciprocal” trade fairness and punishment for transshipping violations. Canada drew Trump’s ire for failing to curb illegal imports and for supporting Palestinian statehood. Brazil was hit with up to 50% tariffs after Trump criticized its legal actions against former president Jair Bolsonaro. Mexico, however, earned a temporary 90-day exemption, buying time amid ongoing negotiations. These moves follow another breakdown in US-China trade talks and come just before Trump’s self-imposed tariff implementation deadline.
The effects of this tariff escalation are rippling through markets. Japan’s Economy Minister Ryosei Akazawa warned about potential currency speculation and emphasized the importance of implementing the Japan-US trade pact to stabilize domestic conditions. For the US, the impact of Trump’s tariffs will become clearer with the upcoming Nonfarm Payrolls and ISM Manufacturing PMI reports. A weaker-than-expected NFP print could reignite rate cut bets, while a strong showing may support Powell’s resistance to easing. As central banks navigate a complex matrix of inflation, labor dynamics, and political pressure, market participants are bracing for continued volatility. With the Jackson Hole symposium on the horizon, and Trump’s global tariff policy redrawing trade lines, both the dollar and global risk sentiment remain on edge.