US & EUROZONE

USD is building on yesterday’s solid gains and trading near a one month high. EUR has been the hardest hit versus USD, sliding by over 2%, amid concerns the US-EU trade agreement reached on Sunday would hurt the Eurozone economy. European stocks followed suit, posting sharp declines yesterday, while European bonds rallied on expectations of additional ECB easing.

It’s true the deal looks broadly asymmetric in the US’s favor. Most EU goods exports to the US will be charged a baseline tariff of 15%. That’s up from 10% since April 2 and about 1.2% before President Donald Trump’s presidency. In exchange, the EU pledged to remove significant tariffs, including the elimination of all EU tariffs on US industrial goods exported to the EU.

However, given the lopsided trade balance between the EU and US (the US goods trade deficit with the EU totaled -$280bn in the 12 months to May), simply avoiding a full-blow trade war may have been the EU’s most realistic objective – and that has now been achieved. The upshot is the trade deal defuses a major external downside risk to the Eurozone economy and reinforces the case for the ECB to stay on hold.

The implication is there is room for the swaps curve to shift higher in favor of EUR, as current pricing nearly fully discounts a 25bps ECB rate cut in the next 12 months. The ECB’s pause, coupled with political pressure on the Fed to ease, offers EUR/USD support. We see EUR/USD carving-out a bottom around 1.1500. If this level gives way, it would pave the way for a test the 100-day moving average around 1.1350.

Beyond the near-term, the underlying EUR/USD uptrend is intact because the key aim of the deal is to rebalance trade between the EU and US. A narrower US trade deficit with the EU means fewer dollars will flow to the EU, reducing the need for those funds to be recycled back into US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds).

Moreover, the US protectionist trade policy can further weigh on USD partly because higher US levy is a downside risk to US growth and upside risk to inflation. Yale’s non-partisan Budget Lab policy research center estimates the 2025 tariffs to date (including the new 15% rate for the EU), would bring the overall US average effective tariff rate to 18.2%, the highest since 1934, and up from 2.4% in January. The higher tariffs would lower real GDP growth by -0.5pp 2025 and imply an increase in consumer prices of 1.8% in the short-run.

The US July Conference Board Consumer Confidence, and June JOLTS reports are due today (both at 10:00am New York/3:00pm London). Consumer confidence index is expected to improve to a two-month high at 96.0 vs. 93.0 in June, however, the data no longer appears to be a reliable indicator of future spending behavior.

Meanwhile, JOLTS Job openings are expected to fall to 7500k after unexpectedly rising to a six-month high at 7769k in May. Regardless, the ratio of job openings to unemployed workers has largely been stable at a level that suggests demand and supply for labor are roughly balanced. This should keep the Fed cautious from rushing back into easing.

CHILE

Chile central bank is widely expected to resume easing and reduce rates 25bps to 4.75% today. At the last meeting June 17, the central bank left the policy rate at 5.00% but opened the door for more easing noting that if its baseline scenario materializes, the policy rate “will be approaching its range of neutral values [estimated to be-tween 3.50-4.50%]” in the coming quarters. With headline CPI inflation tracking slightly below the central bank’s average 2025 projection of 4.3%, a rate cut seems appropriate. The swaps market price-in 75bps of total cuts in the next 12 months and the policy rate to bottom at 4.25%.