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Since mid-month, financial markets have been trying to recover while frantically analyzing all possible developments surrounding the trade war the U.S. launched against its largest trading partners.
Investor sentiment continues to be shaped by fears of a potential U.S. recession against the backdrop of global trade wars. No matter how hard it is for individual countries not directly involved in this web of economic and geopolitical contradictions to try to stay out of it, these events will inevitably affect everyone. The problem is that the U.S. plays such a significant role in the global financial and economic system that any recession would undoubtedly have far-reaching consequences.
In the tariff debate, Trump constantly contradicts himself, which has been fully reflected in market dynamics for the second month, creating chaos. His calls for American businesses to increase goods production and oil extraction run into the real issue of uncertainty about the national economy's future. In response to the looming chaos, companies will likely begin cutting capital expenditures, which would significantly reduce output in the real sector—something already signaled by the latest PMI data for the manufacturing sector, which has fallen below the 50-point threshold, indicating contraction.
With all these issues around, what can be profitable?
I would turn attention to the Forex market, where the U.S. dollar may gain support via the ICE Dollar Index and rise above the 105.00 mark. Currently, it stands at 104.33. A positive factor could be the implementation of high import tariffs against the EU. The euro may come under intense pressure. It has already priced in the EU's plan to fund its army with €800 billion and Germany's proposals to stimulate its economy by a similar amount. However, with no concrete action, the euro may be negatively impacted by the trade tariffs between the EU and the U.S. In this case, the EUR/USD pair may decline significantly.
There's also an interesting situation developing with the Japanese yen. Yields on 10-year Japanese government bonds have surged to 1.59%, the highest level in over 16 years. The reason is a statement by Bank of Japan Governor Kazuo Ueda that the central bank will continue to raise interest rates if previous economic forecasts are realized. Additionally, the governor noted that the Bank is gradually reducing its holdings of government bonds. Last week, the central bank kept rates unchanged, but its comments included a cautious stance on global economic risks—specifically, the potential fallout from increased U.S. tariffs. In this environment, the yen may continue strengthening against the dollar and other major currencies.
Assessing all of this, I believe the topic of the trade war will remain dominant in the markets for the foreseeable future and will directly impact investor sentiment.
The pair is hovering above a strong support level at 1.0780. A break below could trigger a decline toward 1.0725 and then 1.0700. A potential entry point for short positions is around 1.0774.
The pair is trading higher amid the surge in Japanese government bond yields and expectations of further Bank of Japan rate hikes. The pair may find support and rise toward 151.00, then 152.20. A potential entry point for long positions is around 150.67.
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