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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
The desk believes that the FX market's response to President Trump's recent tariff announcements reflects a cautious sentiment among traders, particularly impacting the USD/JPY pair. Per the full note from MUFG EMEA, the yen's recent weakness is exacerbated by rising political uncertainty in Japan ahead of the Upper House elections. This backdrop suggests that the market is pricing in potential volatility as traders assess the implications of U.S. trade policy on global economic conditions. Our consensus target for USD/JPY aligns with this cautious outlook, particularly in light of the absence of high-impact events in the near term.
The desk argues that the FX market is reacting adversely to Trump's latest tariff announcements, amplifying existing uncertainties. The potential for further trade tensions is setting a bearish tone for risk-sensitive currencies, while the political landscape in Japan adds another layer of complexity to the yen's vulnerability.
Supporting this view, MUFG emphasizes that the interplay between geopolitical dynamics and monetary policy is crucial in shaping currency valuations. With Japan facing political uncertainties, this may detract from the yen's safe-haven appeal, leading to further depreciation against the dollar and other currencies. The implication is a challenging environment for the yen, especially if tariffs escalate and global sentiment shifts further towards risk aversion.
Currently, our consensus target for USD/JPY stands at 1.075, firmly within a range of 1.04 to 1.12, suggesting a moderately bullish stance in light of current market conditions. This view aligns well with MUFG's analysis regarding the yen's weakness but diverges slightly from more conservative targets set by analysts in the space.
Some firms resonate with our view, emphasizing a bearish outlook for the yen amidst Trump’s tariff announcements and Japan's political uncertainty. They underline the potential for escalating trade wars impacting risk sentiment across markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
The current geopolitical landscape, particularly in relation to U.S. tariffs, is shaping expectations for currency volatility, especially affecting the yen. Additionally, market participants should remain vigilant regarding how evolving trade policies may influence overall sentiment in broader financial markets.
Risks to this view
Risks include the possibility of further escalations in trade tensions that could undermine market stability and affect currency valuations significantly. Additionally, any unexpected shifts in Japan's political landscape could add layers of volatility to the yen’s outlook.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 11th July 2025, and joining Lee to pose some questions on the financial market themes for the week ahead is Abdullahad Lockhart, Currency Analyst at MUFG. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee. Hi Abdullahad.
It's been an interesting week so far. Market attention has returned to US trade policy over the past week. How has FX markets reacted?
Yeah, like you said, over the past week we have seen a kind of increased focus again on trade policy from the Trump administration. In the FX market, we've seen the dollar kind of gradually recovering throughout this week. I think if you look at the dollar index on a closing price basis, it has now increased for eight consecutive days.
So this is the longest run of gains for the dollar since October of last year. In contrast, if you look at the performance of the yen, that's been the kind of weakest performing G10 currency this week. Certainly, we would say the yen appears to have been certainly more sensitive to the trade announcements this week from President Trump.
We saw Trump announcing that he's going to delay the implementation of the higher reciprocal tariffs until the 1st of August. That's a shorter delay than the first delay, which was 90 days. I guess the intention there is to put more pressure on countries, including Japan, to make trade concessions in order to reach deals, to try and avoid those higher tariffs being put in place on the 1st of August.
As we heard from President Trump, Japan is now facing the threat of a 25% tariff from the 1st of August, alongside the tariffs that are already in place on specific sectors such as autos, steel, and aluminum. For the yen, this is important in terms of it. It will certainly add to the BOJ's caution over hiking rates further in the near term.
As we've heard from the BOJ over the last couple of months, they have indicated that an ease over the level of trade policy uncertainty. Like I say, that doesn't look like that's going to be resolved over the next month or so. From that perspective, the BOJ is still firmly in wait-and-see mode.
That is encouraging some yen weakness. The other kind of FX market mover that we saw this week on the back of the trade policy announcements was the Brazilian real, that did fall more sharply than other currencies against the dollar by over 2%. That was triggered by a bigger tariff surprise from President Trump, where he announced that he's thinking of putting in place a 50% tariff on imports from Brazil.
That was certainly a much bigger tariff rate than we in the market had been anticipating, given the fact that the US is actually running a trade surplus with Brazil. There isn't a trade rationale there really for such a big tariff. As we heard from Trump, the main reason now that he's threatening to put in place such high tariffs on Brazil is more of a political reason to try to force the government in Brazil to cancel the trial of the former president there, who's obviously a friend of President Trump.
So that in itself is obviously a big shift in terms of how the Trump administration is planning to use tariffs, obviously, going forward. You certainly have to question about whether this tariff will be implemented as planned, and even if it is implemented, question whether that is likely to remain in place. There's a very good chance that it's going to be challenged on a legal basis through the courts in the US.
We'd also say as well that fortunately for Brazil, they're a relatively kind of large closed economy, so a higher tariff there, if it is put in place, should help Brazil to kind of absorb that tariff with maybe less negative impact for Brazil's economy. It happens that we did, like I say, see a big initial sell-off in the Brazilian real, and to us that's probably more of a reflection of the fact that the market was already kind of heavily long-positioned. The real carry currencies performed well recently, and the 15% policy rate in Brazil is still very attractive for carry currencies.
And Abdullahat, I know yourself, you've been kind of looking into recent FX market changes in response to Trump's tariff announcements, looking back over the last kind of three to four months. It'd be interesting to hear your latest thoughts. That's right, Lee.
So yeah, this week we've been examining the impact of Trump-era tariff announcements on our FX markets using an event-driven methodology. The hypothesis dubbed TACO, Trump Always Chickens Out, suggests market participants have been increasingly indifferent to the administration's aggressive trade rhetoric. So observers note a recurring pattern in price action, where there's an initial reaction which tends to fade as the anticipated escalation in trade tensions fails to materialize.
So to perform this analysis, we calculate the cumulative of normal fluctuations following each announcement, particularly those targeting China and the EU and other major trading partners. These announcements were selected based on the potential to influence FX markets, especially the dollar, CNY, euro, and yen pairs, and including Liberation Day and other tariff announcements. But what we observed in tariff announcements triggered notable abnormal fluctuations in major currency pairs, reflecting shifts in risk sentiment, trade expectations, and capital flows.
However, as the frequency of such announcements increased without sustained policy escalation, FX markets began to discount their significance. And this was reflected by the size of daily fluctuations falling from well below the prior 120-day average. So one interpretation of recent market behavior is that participants are becoming increasingly complacent in response to tariff-related headlines.
So should Trump follow through on his rhetoric and implement large-scale aggressive tariffs, the FX market may be caught off guard. And this risk is particularly acute heading into summer months, a period typically characterized by lower liquidity. In such an environment, even modest surprises can prompt sharp moves in the elevated FX and traders should remain alert to the potential for policy follow-through risk, especially in trade-sensitive currency pairs such as cable, euro, dollar, and yen.
Yeah, so Lee, have there been any other factors that have contributed to yen weakness? Yeah, I think another factor which we think is going to get more market attention in the coming weeks is the upper house election in Japan that's set to take place on Sunday the 20th of July. And there is a risk there that the outcome from that upper house election could trigger further yen weakness as we head into month end.
Just giving you a bit of background about the political situation ahead of that upper house election. Obviously, last year, we did see the government in Japan, the LDP party, Komeito, they lost their majority in the lower house. That did lead to a change in the leadership of the LDP party with current Prime Minister Ishiba taking over.
But as we've seen, his popularity has been falling ahead of these elections and that's having a negative impact as well on the popularity of the ruling parties in Japan. So we do think there is a real risk there that the government could also lose its majority in the upper house as well. That obviously would be a very destabilizing result for the government which like I say already has lost its majority in the lower house.
And that could then certainly undermine the ability for Prime Minister Ishiba to continue to lead the LDP party going forward. So in terms of the arithmetics of going into the election, the current coalition government, the LDP and Komeito, they currently hold 141 seats. Of those seats, only 75 are not set to be contested.
So for the government to maintain its majority in the upper house, they'll need to win at least 50 seats. And looking at the latest opinion polls in Japan, we do think there's a reasonable chance that they could lose their majority. I could say if they were to lose their majority, that could then lead to a change in the leadership again of the LDP party.
And one potential winner we think from that could be Sanae Takahashi. She got to the final round of the runoff against Ishiba when he became the Prime Minister in Japan. We do think she would be well positioned to be one of the favorites potentially to succeed Ishiba if he was to be replaced after the upper house elections.
The important factor for the FX market would be the fact that Sanae Takahashi, she has previously indicated that she is more aligned with former Prime Minister Shinzo Abe and his Abenomics policies. So if she was to be, if the market was to speculate that she could become the next Prime Minister, then that could trigger weakness in the yen in anticipation that that could then put more pressure from the government on the BOJ to maintain a looser monetary policy for longer. So I think these are the kind of risks that we are watching going into that upper house election.
Obviously, the government could still maintain its majority there, which would then limit the negative impact on the yen, but it's certainly a downside risk, which we think is worth watching going forward. And that brings an end to today's podcast. Thank you for listening and have a good week ahead, everyone.
Thank you for listening to this MUFG Global Markets Podcast. Rate, review, and subscribe. Contact your MUFG sales rep for more information.
Come back next week for more insights from the Global Markets Research Team. Thanks for listening. I'm your host, Ramin Khan, and I'll see you next week.
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