Donald Trump’s self-styled “Liberation Day” has finally arrived, sending shocks waves across financial markets around the globe. Today, traders are waiting on the big U.S. payrolls report. They are particularly focused on a speech from Federal Reserve Chair Jerome Powell, as both could provide new, critical insights into the changing economic landscape. With recession fears hanging over the world, the American dollar is becoming weaker. This new regime of expectations regarding the Federal Reserve’s monetary policy has reportedly increased currency pairs’ volatility.
Traders play the new U.S. payrolls data against a likely recessionary bond and stock backdrop. The Federal Reserve continues to grapple with regaining credibility after misjudging a significant surge in consumer prices following the pandemic. Market analysts should keep their eyes on these advances, as they carry significant ramifications for fiscal policy and long-term economic growth.
Fed’s Credibility at Stake
The Federal Reserve Board is facing significant pressure to redeem itself after a series of miscalculations on inflation’s trajectory. Most economists are confident that inflation will not become a concern. If it does, the Fed might be able to bring its policy rate down to 3.5% over the next year. That expected drop is due in large part to a very real and persistent need to calm worsening economic conditions, while keeping the goal of sustainable growth within reach.
Against such expectations, market participants are growing increasingly to looking to translate dovish pivots from the Fed. Some of the dollar’s weakness has been blamed on these fears of recession and a reassessment of Fed policies.
“The downgrade reflects our expectations of a continued weakening of China’s public finances and a rapidly rising public debt trajectory during the country’s economic transition.” – Fitch
Fitch’s observation introduces a third element of worry, this one related to the changing dynamics of global trade and what that could mean for the U.S. economy. The trade war as a whole, with tariffs escalating and adding to deflationary pressures, has added to the negativity in the financial environment.
Financial Markets React
Indeed, the financial markets went haywire immediately after Trump first announced his tariff-happy, new-nuke policies. Analysts pointed to huge drops in nearly every sector as investors scrambled to understand what all of this meant. German bunds were bolstered by falling yields. The drop was 3 basis points for 30-year bonds and 9.5 basis points for five-year bonds.
After these moves, traders are looking ahead to the U.S. non-farm payroll (NFP) report as the next big gauge of labor market conditions. Another down payroll report would surely fuel more concerns of an imminent recession. That would lead to greater turbulence in all currency pairs, particularly the USD/JPY, which is nearly at a six-month low of 145.9.
Moreover, gold prices were met with new supply pressure on Friday, though potential for the downside seems somewhat capped with risk aversion still prevalent in markets. Enter the Japanese yen, which is reinforcing its days as a go-to refuge.
The Zloty Faces Challenges
Against this especially difficult economic backdrop, the Polish zloty has come under severe pressure. When National Bank of Poland Governor Adam Glapinski took a dovish turn, the zloty cratered. EUR/PLN rocketed on the back of this, rising from around 4.18 ahead of the press conference to close the day on nearly 4.225. These types of movements are an indication of larger, more underlying fears about local economic stability in the face of global trade wars.
Just recently, the National Bank of Poland surprised most analysts with their decision to hold the interest rate at 5.75%. They had expected a hawker reaction to that booming inflation. However, during the press conference, Glapiński suggested that he might lean toward a more prudent approach. This policy may have permanent implications for the zloty’s exchange rate.
As Fitch anticipates sustained fiscal stimulus to support growth amidst subdued demand and rising tariffs, market participants remain vigilant regarding how these factors will unfold in future monetary strategies.