Global financial markets are breathing a sigh of relief after the United States (US) is getting closer to finalizing several major trade agreements, including signing a formal agreement with Japan and showing positive progress in tariff negotiations with the European Union (EU).
This development has eased global trade tensions that have been overshadowing investor sentiment and has also given new life to markets and risky assets.
However, despite the good news, political pressure on the Federal Reserve (Fed) is heating up when US Commerce Secretary Howard Lutnick publicly called for Fed Chairman Jerome Powell to be fired.
More surprisingly, President Donald Trump is scheduled to visit the Fed's office today, a rare action that is seen as further undermining the perception of the independence of the major financial institution.
New Direction of US Trade Policy Opens Space for Relief
The trade agreement signed with Japan and the extended negotiations with the EU show that the US is now taking a more tactical and pragmatic approach to international trade issues.
If the 15% reciprocal tariff agreement with the EU is successfully finalized this week, it could avert a new trade war by the August 1 deadline for tariffs.
For investors, this move reflects the US administration's willingness to stabilize global trade relations as something that is seen as able to boost market sentiment and potentially contribute to a resurgence of interest rate hikes if economic growth and inflation strengthen.
US Dollar Under Pressure Due to Political Pressure on the Fed
The US dollar began to decline after a strong statement by the Commerce Secretary stating that Powell "needs to step down immediately". Trump's visit to the Fed office today was seen as worrying investors as it signaled that monetary policy may be influenced by political pressure.
While good news from the trade perspective provides support for macroeconomic fundamentals, political interference in monetary policy could create uncertainty, especially regarding the direction of interest rates and the credibility of the Fed's future policy guidance.
US-China Trade Negotiations Still a Factor of Uncertainty
While trade tensions with Japan and the EU are beginning to ease, negotiations with China still remain a key factor that is difficult to predict. A meeting between US trade envoy Bessent and Chinese officials in Stockholm next week is expected to provide an early indication of whether the tariff truce can be extended.
However, with President Trump previously insisting he will not lower tariffs below 15%, any progress is expected to require bilateral compromises, not just unilateral concessions. While limited, it could still provide hope for a broader easing of tensions.
Implications for Forex Financial Markets
FX Markets: The US dollar remains under pressure on concerns over the credibility of the country's financial institutions, despite signs of economic recovery. Conversely, currencies pegged to trade-sensitive countries such as the euro and yen are expected to benefit from reduced geopolitical risks and a return to policy normalization.
Currency Trading Strategies:
The Japanese yen is expected to remain strong if expectations of a rate hike increase increase, driven by Japan's more stable trade position.
The euro could rise if the ECB takes a more neutral stance while providing clear guidance based on global stability.
The US dollar may continue to weaken if political pressure on the Fed increases or investors begin to reassess reputational risks to the country's monetary policy.
Conclusion
Global markets are currently entering a phase of readjustment. The easing of trade tensions, especially with the signing of a US-Japan agreement and the potential for a joint EU agreement, has softened the global risk landscape.
However, the increasing political interference in US monetary policy matters raises doubts about the credibility and effectiveness of the Fed in maintaining an independent and prudent policy.
As global central banks begin to reassess their respective monetary policies in an increasingly stable external environment, currency markets are expected to remain sensitive to geopolitical cues, central bank policy statements and political developments.
Traders should remain vigilant against asymmetric policy risks, especially as political factors increasingly outweigh real economic fundamentals.
