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S&P 500 futures are now back up around 1% on the day while 30-year bond yields in the US have eased to around 4.84% currently. On the latter, that’s down from around 4.91% at the high earlier and will allow broader markets to breathe a little easier heading into US trading. China retaliated by increasing tariffs before saying that they won’t go any further than that. It’s logical as effectively, over 100% tariffs is already a trade embargo between the US and China. Anything more doesn’t change that.

US futures might have recovered but as things stand, I will continue to emphasise that the focus should be on the bond market still. That triggered Trump’s pain threshold earlier in the week and we’ll see if that will happen again before the weekend comes along.

With China choosing not to blink first, there is a line of thinking that it is either Trump or the Fed who will surely have to blink next. The question though is when? Will it be before the weekend or during? Or perhaps even after? That as the turbulence and pain threshold in markets continue to be pushed to its limits.

As such, it looks like we’re just going to stay glued to the screens and watch for headlines over the next 10 hours.

This article was written by Justin Low at www.forexlive.com.

• Joint fiscal capacity is an appropriate response to shocks.
• Market infrastructure in Europe is functioning in an orderly fashion.
• We are monitoring carefully all market developments.
• We don’t target any exchange rate.
• If I was aware of Fed intervention in support of Treasuries I would not tell you.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

That’s a good sign at least that things are moving along quickly, at least on this front. But as for the outcome of the negotiations, we’ll see. If 10% tariffs remain the baseline for everyone, it’s still not exactly a good thing.

This article was written by Justin Low at www.forexlive.com.

• ECB is monitoring and ready to use instruments it has if needed to procure price stability.

She’s just saying that the central bank stands ready to use all of its instruments in case things go awry.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• 10% remaining tariffs are a blow to the global economy
• Economic outlook getting more unpredictable
• Estimates that the euro area could suffer 0.2% to 0.6% GDP loss from tariffs
• Europe does not want a confrontation on tariffs

Dombrovskis adds that they are willing to offer zero-for-zero tariffs on goods at this stage. So, we’ll see. They have three months to strike a compromise and if not, we’ll have to run the drama all back again.

This article was written by Justin Low at www.forexlive.com.

Rate cuts by year-end

• Fed: 95 bps (63% probability of no change at the upcoming meeting)
• ECB: 80 bps (99% probability of rate cut at the upcoming meeting)
• BoE: 86 bps (90% probability of rate cut at the upcoming meeting)
• BoC: 45 bps (56% probability of no change at the upcoming meeting)
• RBA: 125 bps (69% probability of 25 bps rate cut at the upcoming meeting)
• RBNZ: 81 bps (96% probability of rate cut at the upcoming meeting)
• SNB: 27 bps (74% probability of rate cut at the upcoming meeting)

* for the RBA, the rest of the probability is for a 50 bps cut.

Rate hikes by year-end

• BoJ: 7 bps (99% probability of no change at the upcoming meeting)

We can see that from yesterday’s update, when the sentiment was still more positive due to Trump’s tariffs pause, rate cuts bets increased once again following another selloff in the stock market.

We have bets for a 50 bps cut for the RBA and some expectations for the SNB going back to negative rates to combat the huge appreciation in the Swiss Franc.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Akazawa will be meeting with Bessent and Greer for talks, according to the NHK.

Japan being one of the closer allies to the US makes this process a bit easier, alongside the fact that they are the ones to approach Trump and his team to talk. But right now, the focus is solely on China and there’s a chance we might not get any progress by the weekend unless Trump or the Fed blinks. If so, be wary of further de-risking later in the day before the two-day break.

This article was written by Justin Low at www.forexlive.com.

We’ve been expecting this and it finally happened: China retaliated tit-for-tat with a 125% tariff hike on US goods. This is not what we should focus on though as it’s now effectively a trade embargo between the two countries.

The key line was China saying that it will ignore any further US hike because it will be just a numbers game which has no practical economic significance. This is basically what Trump said in his press conference following the 125% hike on China. We reached the peak in escalations.

Trading wise, the downside in the stock market is now kind of “limited”, and by limited I’m not saying the market can’t go lower, but risk/reward wise, I would start looking in the opposite direction.

This is also something you can “feel” from the market’s reaction. If you recall, the first retaliation triggered an aggressive selloff. The second retaliation caused just some losses that were later recovered. And now, with this third retaliation, the market is holding pretty well despite some selling.

So, we’ve gone from big moves to small ones. The market might now be looking forward to general de-escalation. The problem is that Trump will need to swallow his pride and make the first step because China has the upper hand at the moment.

He might sell it as him being superior and negotiating for the greater good because he cares about doing the right thing for the world and what not, but he is the one that will need to act first because China clearly isn’t going to do so (and it shouldn’t since it hasn’t started the trade war in the first place).

I know it’s hard to imaging this, but if Trump really cares about markets (and he does as we found out with the bond market selloff), then he must act because his “political capital” can’t save him for long.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

EUR/USD briefly clipped the 1.1400 mark while USD/JPY is now looking to secure a firmer break under 143.00 in trading today. The latter is now trading to its lowest levels since September last year:

From a technical perspective, the 140.00 mark is the next target on the charts. But at this point, headline risks are paramount.

Besides that, USD/CHF continues to eat into the lows set all the way back in 2015 when the SNB did the rug pull on the EUR/CHF floor. Man, has it been 10 years already? The pair is now down another 1.1% to 0.8140 currently.

Elsewhere, US futures are dribbling lower with S&P 500 futures down 0.3%. 30-year Treasury yields are at 4.875% so the good news at least is that the pressure on the bond market isn’t tipping it over towards 5% just yet. But it might just be a matter of time if there is no help from Trump or the Fed before the weekend.

Right now, China shows that it isn’t going to be the first one to blink in this game of chicken.

This article was written by Justin Low at www.forexlive.com.

• Trump’s economic and financial agenda is wrong path.
• The EU mustn’t follow Trump on financial regulation.
• Deregulation would sow seeds of financial crises.

Nothing new here as everyone’s critising Trump’s trade war as you would expect.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

In the FX world, everyone is talking about the US Dollar selloff and there are even talks of the greenback losing its reserve status and what not. Generally, when people get very bearish (or bullish) something, that’s when the market does the opposite. Bloomberg reported that traders are the most bearish on the USD in five years. That’s something.

I generally don’t look too much inot the CoT report, but it catches my attention when I see the price diverging with the futures positioning. That’s often a sign that we are near a top or bottom. The problem is that the CoT is a lagging indicator since it’s reported with a one week lag. But it’s a warning sign nonetheless.

In the chart above, you can see that the EURUSD price (black line) surged into new cycle highs, while the CoT (blue line) actually fell in the most recent update (that included already a new high in the price). So, we are having a divergence. If you look left, you can see that such divergences preceded reversals.

Now, the main driver of major FX pairs are yield differentials. In the chart below, we can see that the EURUSD price (red line) is diverging massively with the EU/US differential (blue line). Something has to give (granted that yields might be undergoing technical distortions and not being fundamentally driven).

The problem right now is that we are having strong dislocations in markets and it’s hard to distinguish the signal from the noise. Fundamentally, I can see the reason for the US Dollar to depreciate in the medium to long term, but in the short term, shorts got overstretched on the basis of aggressive Fed cuts probably. And the Fed is unlikely to cut unless we go into a recession.

So, the risks to USD shorts (in the short term) will probably come from positive signs on negotiations with China and a general de-escalation so that the aggressive rate cuts bets get unwound (most likely scenario) or the Fed starts to put on the table rate hikes (which is the most unlikely scenario right now).

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• It no longer makes economic sense if US imposes more tariffs
• US should bear the responsibility for the damage caused by tariffs

This article was written by Justin Low at www.forexlive.com.