It’s TACO Tuesday, as markets ignore Trump’s tariff threats

09:36 8 July 2025

This week was all about Wednesday’s reciprocal tariff deadline in the US. Except, Donald Trump has now kicked the can down the road to August 1st. This means that countries who have yet to secure a deal, or a letter, will have three weeks for more negotiations. The President may have hit Japan, South Korea and other trade allies with tough tariff rates on Monday, but even these aren’t set in stone, and the market reaction on Tuesday reflects this.

Japan fights fire with fire on trade talks, as stocks remain calm

Japanese stocks are higher, the Nikkei is higher by 0.25%, and the loss in the last 5 days is a mere 0.75%. This suggests that we are not repeating the sharp sell off and spike in volatility that we saw in April. After falling sharply on Monday, US equity futures are also pointing to a higher open later today, and the Vix is stable and below the average rate for the last 12 months.

As negotiations continue, officials in Japan have stood firm against Trump’s tariffs and set out their red lines earlier today. They said that they will not sacrifice Japanese agriculture in trade talks with the US, and an agreement with the US will not be reached until there is a better agreement regarding the car sector. This is worth noting. Japan is fighting fire with fire and is not backing down to get a quick trade deal with the US on better terms. This suggests that Japan thinks that Trump will back down and lower their tariff rates in the coming weeks. The market is aligned with this view, hence the mild reaction to yesterday’s tariff news.

EU/US trade agreement could push EUR/USD to $1.20

The dollar is erasing Monday’s gains, and the yen is down a mere 0.1% on Tuesday, the South Korean won is in recovery mode and is higher by 0.8% vs. the USD this morning. The euro is also higher on Tuesday, and EUR/USD is a mere 140 points away from $1.20. Reports suggest that a trade agreement is in the wings between the EU and the US. The US has offered the EU a 10% baseline tariff rate, except for aircraft and sprits. This is a rate that the EU could cope with and may not have major economic ramifications.

This deal has not been officially announced, and the EU could still come under pressure from tariffs if the US announce more sector specific tariffs, including on pharma. However, for now, the news is positive, and unless something changes that, today could be a good day for the single currency, with $1.20 a possibility. Hopes for a trade deal means that weakness in Germany’s imports and exports for May have been sidelined, as traders favour the euro over safe havens.

Bond yields surge as Trump’s trade deals weigh on bonds

The bond market is also reflecting a potential EU/ US trade agreement. European bond yields are rising sharply on Tuesday. The 10-year German Bund yield is higher by 5bps and yields are rising at a faster pace in Germany than in the UK and the US. Japanese long end bond yields are also rising sharply. Whereas German yields are rising because of a rumored positive trade deal between the EU and the US, Japanese yields are rising because there are concerns that a bad trade deal with the US will push up Japan’s government borrowing needs.   

Is this the peak for the Swissie?

The FX market is in risk on mode today, the Swiss franc is one of the weakest currencies in the G10 FX space on Tuesday, after reaching multiyear highs vs. the USD and the EUR. This is a sign that risk sentiment is back on, and it will be worth watching to see if the Swissie loses ground from here, as the existential threat from tariffs recedes.

Ahead today, the focus will be on trade headlines and the potential for an announcement of an EU/US trade deal. Will Trump be as lenient to the EU as reports suggests? If yes, then this is a big win for the currency bloc.

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Written by

Kathleen Brooks

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