The USDJPY traded higher but then back down after announcing a trade deal with the US which includes a 15% tariff on Japanese goods coming into the US. The EURUSD is modestly lower after rising sharply the first two days of the week. The GBPUSD is stepping higher and continuing its move to the upside this week. The U.S.-Japan trade deal, announced by President Trump, includes a 15% "reciprocal" tariff on Japanese goods exported to the United States, notably applying to automobiles and auto parts. This gives Japan a significant advantage over other car-exporting nations still facing a 25% tariff since April. In return, Japan will open its markets more broadly to U.S. goods, including cars, trucks, rice, and other agricultural products. Japan also committed to a $550 billion investment in the U.S., primarily through equity and loans in strategic sectors like pharmaceuticals and semiconductors, with the U.S. expected to retain 90% of the profits from these ventures.The agreement also allows the share of American rice imports into Japan to increase, though Japan claims its domestic agriculture will not be compromised. While hailed by both sides as a landmark achievement, Japan’s Prime Minister Ishiba emphasized the deal's low tariff burden as a net-positive for a country with a trade surplus. The deal is viewed as a strategic breakthrough that removes the immediate threat of 25% auto tariffs and positions Japan favorably compared to other trading partners. However, tariffs on Japanese steel and aluminum (currently at 50%) remain unresolved, with further talks expected.U.S. Treasury Secretary Scott Bessent said that talks with the European Union are progressing more positively than they had been in earlier stages. He characterized the EU’s retaliatory preparations as a negotiating tactic rather than a signal of breakdown. On trade with China, Bessent stated the U.S. is in a good place and now positioned to move on to broader, more substantial discussions. When asked whether the EU could secure the same 15% auto tariff rate granted to Japan, he noted that Japan's arrangement was a different kind of deal—one he described as “innovative.” He emphasized that the U.S. does not seek to decouple from China but instead aims to de-risk supply chains to ensure greater economic resilience.EU Trade Commissioner Maroš Šefčovič is scheduled to speak with U.S. Commerce Secretary Lutnick later today, as part of ongoing technical and political-level discussions between the two sides. The EU emphasized that its primary objective remains reaching a negotiated outcome with the United States. However, it is simultaneously preparing for all potential outcomes, including the implementation of additional countermeasures. To streamline its approach, the EU will merge Lists 1 and 2 into a single list of potential retaliatory actions. These measures include a combination of tariffs and tools such as the bloc's Anti-Coercion Instrument (ACI). While negotiations continue, markets have been encouraged by the U.S.-Japan trade deal announced earlier, though the EU’s position differs significantly, especially given Japan's unique domestic political dynamics involving Prime Minister Ishiba.Bank of Japan Deputy Governor Uchida struck a cautious tone in his latest remarks, emphasizing that while Japan’s economy has recovered moderately, there are clear signs of weakness in certain sectors. He warned that economic growth is likely to slow due to the impact of trade and other policy factors, and noted that uncertainty around global trade remains extremely high. Uchida reaffirmed the importance of maintaining loose monetary policy to support the economy, stating that any future rate hikes would depend on whether economic and price trends align with the Bank’s projections. He stressed there is no preset path for tightening and highlighted that underlying inflation remains sluggish, with cost-push factors—especially in food—driving current inflation pressures. Overall, he described economic risks as skewed to the downside, reinforcing expectations that the BOJ will maintain its ultra-accommodative stance for the time being.In contrast to the cautious tone, traders have increased their bets on a Bank of Japan (BoJ) rate hike by the end of the year, fueled by optimism following the newly announced U.S.-Japan trade deal. The agreement is seen as a key development the BoJ had been awaiting before considering further policy adjustments. Political dynamics in Japan may also be contributing to the shift in expectations, with the ruling bloc losing its upper house majority and Prime Minister Ishiba potentially offering fiscal concessions to preserve his agenda—moves that could stimulate growth and prompt the BoJ to tighten policy more than previously anticipated. As it stands, markets are pricing in a 19 basis point BoJ hike by year-end, with a 98% probability of no change at the next meeting. In contrast, other major central banks are expected to cut rates by year-end: the Fed by 46 bps, ECB by 25 bps, BoE by 50 bps, RBA by 65 bps, RBNZ by 37 bps, and BoC by 17 bps, while the SNB is expected to hold steady.European equities are trading higher, buoyed by improved market sentiment following the U.S.-Japan trade deal, which has sparked optimism for further trade agreements. Major indexes posted strong gains: Germany’s DAX +0.64%, France’s CAC was 1.06% Italy’s FTSE MIB +0.72% UK’s FTSE +0.45% Spain’s IBEX +1.21%In the US, the major stock indices are higher as implied by the futures:Dow industrial average up 234 pointsS&P index up 24.3 pointsNASDAQ up 39.56 pointslooking at the US debt market, yields are little changed2-year yield 3.839%, +0.9 basis points5-year yield 3.893%, +1.8 basis points10 year yield 4.355%, +0.2 basis points30 year yield 4.99%, +2.7 basis pointsin other markets: crude oil is down $0.45 or -0.70% at $64.85. The price is trading above and below its 100 day moving average at $64.94. Gold is trading down -$6.24 or -0.18% at $3425Bitcoin is trading down $1400 at $118,618Alphabet announces their earnings after the close today. This article was written by Greg Michalowski at investinglive.com.