USD/JPY: Short-term trend is dominated by the yen

■ Japan-US tariff negotiations have reached an agreement. The market expects the Bank of Japan to raise interest rates ahead of schedule, leading to a stronger yen. 

■ Starting in August, the market will focus on US employment, inflation indicators, and the Fed's policies. Consequently, the foreign exchange market will shift back to a trend mainly driven by the US dollar. 

The US government has reviewed the mutual tariff rates for major trading partners that have been in effect since April 9 and has successively reached agreements with relevant countries under different conditions. Although the initially high tariffs have been lowered, concerns about rising inflationary pressures in the US persist. Expectations that the Federal Reserve (FRB) will cut interest rates in July have almost completely dissipated, boosting the US dollar. In Japan, the market remains cautious ahead of the Senate election on the 20th, amid predictions that the Liberal Democratic Party and the Komeito coalition government may face a significant defeat. This has led to concerns about expansionary fiscal policies, such as tax cuts advocated by opposition parties, resulting in further yen depreciation. Yesterday, Japan and the US reached a trade agreement to reduce tariffs to 15%. However, steel and aluminum products were excluded from the deal and are still under negotiation, creating some uncertainties. Nonetheless, current market risk sentiment appears to have eased. 

In the short term, the foreign exchange market will be dominated by the yen. The Bank of Japan's Financial Policy Decision Meeting (BOJ Meeting), scheduled for the 30th and 31st, is expected to keep current policies unchanged. Additionally, the Economic and Price Situation Outlook Report is anticipated to revise the inflation outlook upward, with attention on any changes in the policy committee members' perception of risk balance. Yesterday, in response to the US-Japan tariff negotiations, Uchida, deputy governor of the Bank of Japan, stated that as economic uncertainty diminishes, the likelihood of achieving the 2% inflation target increases. The market initially predicted the next rate hike in January 2026, but with easing Japan-US trade frictions, many now believe it could be moved forward to October 2025. Although Prime Minister Ishiba has voiced commitment to continued governance, political stability remains uncertain, and the outlook for economic policy is unclear. Short-term yen appreciation is therefore expected to be limited. 

Regarding USD/JPY, if it drops below half of the increase from the low of 142.66 yen on July 1 to the high of 149.18 yen on the 16th (around 145.92 yen), but then stabilizes near the 61.8% retracement level and the 50-day moving average at 145.15 yen, the overall trend of a strengthening US dollar and weakening yen—based on the April low of 139.86 yen—will remain intact. The upcoming Federal Open Market Committee (FOMC) meeting scheduled for the 29th and 30th is likely to keep interest rates steady, exerting limited influence on the dollar trend. However, US employment and inflation data in early to mid-August will be critical in guiding monetary policy decisions after September, reinforcing a US dollar-dominated trend.