Last month, President Donald Trump declared general tariffs on all U.S. imports. This decision has led to massive outrage across the European Union, and especially in Hungary and Slovakia. The President has referred to it as “Liberation Day.” With these tariffs set to have deep economic impacts, traders are keenly awaiting next week’s U.S. Non-Farm Payroll (NFP) report and upcoming Federal Reserve Chair Jerome Powell’s speech for further market direction.
The tariffs go into effect Thursday and expand their scope to 100 countries, making traders wary of conducting transactions involving those tariffs. The subsequent ripple effects will surely be felt across the Eurozone and within Germany. As we’ve previously written, Hungary and Slovakia stand to be the most vulnerable – they have the highest exposure to these tariffs. Yet the economic landscape is shifting fast. This change would likely be enough for these countries to suffer a profound reversal in their fast growth.
Economic Impact on Hungary and Slovakia
Hungary and Slovakia are expected to suffer considerable losses from the trade defenses. According to estimates, their GDP would fall by an average of 0.8 percentage point. This substantial economic hit highlights the interconnectedness of global trade and the vulnerabilities faced by smaller economies reliant on exports.
The tariffs’ effects also stretch far outside these two countries. The most negative expected loss ranges from -0.5 to -0.6 pp of GDP in Czechia, Poland and Slovenia. This inward-looking trend explains a broader trend across Central and Eastern Europe (CEE). It would be Croatia and Romania that would experience the mildest impact. We find the negative effects to be around -0.4 percentage points.
These figures demonstrate how easy it would be to economically destabilize the entire region. Companies and public sector entities alike are grappling with how to navigate this new trade normal. The state’s heavy reliance on exports means that a downturn in the state’s trade relationships can quickly turn into more general economic woes.
Market Reactions and Currency Fluctuations
As the news of the tariffs first trickled out, the bond market responded immediately. It kept up with international trends, leading to a drop in the yields. CEE currencies were the biggest losers on Thursday, a reflection of investors’ concern about longer-term economic outlook in these countries. The EUR/USD exchange rate continued to oscillate during Friday’s European session, giving up all of the earlier session gains to trade even on the day around 1.1050.
Traders are understandably spooked by the unpredictable nature of the tariffs. Consequently, they’re taking a hawkish approach, concerned about the risk of long-lasting negative economic impact. A recent CryptoQuant report underscored that many crypto traders are reconsidering their strategies while attempting to tackle a more intricate economic landscape.
Central Bank Responses and Future Projections
Poland’s central bank governor Adam Glapinski sounded dovish at a press conference last week. He signaled that new monetary easing might be in the cards. He suggested that interest rate cuts could exceed 100 basis points by 2025, demonstrating an awareness of the challenging economic landscape ahead.
Looming central bank interest rate cuts and other monetary policy easing. This new proactive approach is a direct reaction by the Federal Highway Administration to the outside pressures created through tariff implementations. Countries all over the CEE region are preparing for possible economic consequences. Central banks can pursue more proactive monetary strategies that befit their developing economies.