Stocks rally as US-Japan trade pact fuels optimism, Yen weakens on political turmoil

Market sentiment and news overview

Global equities continued their record-breaking run after the US and Japan struck a landmark trade deal, setting a 15% tariff on Japanese imports—lower than the previously threatened 25% rate. The agreement also included a pledge from Japan to invest $550 billion in the US, and further commitments to purchase 100 Boeing aircraft and increase agricultural and defense imports. This clarity on tariffs powered the MSCI Asia Pacific Index up nearly 2% to a four-year high, while Japan’s Topix Index surged as much as 3.6%.

The Dow Jones Industrial Average futures edged higher by 0.3% after the cash index closed at a fresh all-time high. European futures advanced 1.2%, and tech stocks remained in focus as the “Magnificent Seven” are forecast to post a 14% rise in Q2 profits (Bloomberg Intelligence).

However, the deal’s announcement rattled Japan’s bond market. The 40-year JGB auction recorded its weakest demand since 2011, with a bid-to-cover ratio of just 2.127 (down from 2.214 previously), pushing the yield to a record 3.375%.

Yields rose across the curve, and the 10-year JGB yield climbed to 1.59%, its highest since 2008, amid concern over increased fiscal spending and news that Prime Minister Ishiba is set to resign after his coalition lost its upper house majority.

On the currency front, the yen weakened after an initial bounce, as political and bond-market volatility overshadowed the trade deal benefits. The USD/JPY traded up to 147.20, and the dollar index (DXY) stabilized near 97.53.

Technical analysis

DXY (US Dollar Index, daily)

The DXY remains in a well-defined downtrend channel. Yesterday’s bounce failed at 98.19 (Fib 61.8%), with resistance at 98.95. RSI at 43.9 and a flattening MACD suggest limited bullish momentum.

Main Scenario: Below 98.19, DXY risks retesting support at 97.38 (Fib 127%), 96.95 (Fib 161.8%) and 96.48 (Fib 200%).

Only a close above 98.95 would reverse the bearish trend.

US30 (Dow Jones, Four-hour)

The Dow continues to trend within an ascending channel. Price holds above support at 44,459 (Fib 61.8%) with upside targets at 44,713 (Fib 127%), 44,848 (Fib 161.8%), and 44,996 (Fib 200%).

RSI: 60.7 (mildly bullish). MACD positive, supporting trend continuation.

Main Scenario: Momentum remains bullish toward 44,850–45,000, especially if corporate earnings surprise to the upside.

Only a break below 44,459 signals risk of deeper pullback towards the last bottom at 44,218.

JP10Y (Japan 10Y Govt bond yield, four-hour)

Yield has rebounded sharply from a low of 1.49% following the weak 40-year auction and political uncertainty. The technical ceiling is at 1.60%, with potential extension to 1.63% (Fib 127%) and 1.67% (Fib 161.8%) if volatility persists.

RSI: 64.3 (approaching overbought).

Main Scenario: Above 1.60%, curve steepening is likely, mirroring concerns over government spending and BOJ tapering.

Only a return below 1.56% would ease upward pressure and push the Yields toward testing the lower boundary of the ascending channel.

USD/JPY (one-hour)

USD/JPY remains in a short-term downtrend, but the recent price action shows a decisive break above the previous local high at 146.94, signaling a potential bullish correction. The pair is now approaching a critical resistance zone formed by the Fib 161.8% extension at 147.40 and the 200% extension at 147.69, which are closely aligned with the descending trendline from earlier highs. This cluster marks a significant decision area for traders.

RSI: 57.5 (bullish bias but not overbought), Stochastic at around 83.9 (overbought territory, warning of short-term exhaustion), MACD is turning positive, supporting the bullish momentum

Main Scenario: As long as the pair holds above 147.14 (Fib 127.2% and previous swing high), the bullish correction is likely to continue, with the next resistance targets at 147.40 and 147.69. A sustained break above 147.70 would indicate a deeper reversal toward the 148.00 zone and challenge the broader downtrend.

If USD/JPY fails to maintain momentum above 147.14 and faces rejection near 147.40/147.69, a pullback is expected. Initial support lies at 146.65 (Fib 61.8%). A break below this level would revive the bearish trend, exposing the recent low at 146.19.

Outlook and conclusion

Positive surprises on trade and earnings continue to support risk appetite. The US-Japan deal removes a key source of global uncertainty, helping stocks to fresh highs and providing a clear blueprint for other Asian economies negotiating with Washington. The agreement’s $550 billion investment pledge and tariff clarity have been particularly supportive for Japanese exporters, with Toyota up 16%.

However, bond markets—especially in Japan—remain unsettled. The weakest 40-year auction since 2011, the record yield of 3.375%, and rising 10-year yields signal worries about future government spending and a potential withdrawal of BOJ support. Political instability, as Prime Minister Ishiba prepares to resign, adds to the uncertainty and may continue to pressure the yen.

The dollar index (DXY) is at risk of further weakness if global equities continue to rally and safe-haven flows recede, but major support at 97.38 will be key.

US stocks remain buoyant, driven by AI earnings optimism and healthy breadth, but remain sensitive to any new developments on tariffs or Fed policy.

Key upcoming events (Economic calendar)

• 14:00 (USD): MBA Mortgage Applications (prev. -10.0%).

• 17:00 (USD): Existing Home Sales (forecast: 4.00M, prev. 4.03M).

• 17:30 (USD): EIA Crude Oil Inventories (forecast: -1.40M, prev. -3.86M).

• 20:00 (USD): 20-Year Bond Auction.

• 21:00 (NGN): Nigeria Oil Production (Q2).

• 22:00 (ARS): Argentina Retail Sales (YoY, prev. 48%).