New uncertainties in global trade and increasingly gloomy US economic signals are adding pressure on investor sentiment, making it difficult to anticipate the direction of monetary policy, at a time when the market still expects an interest rate cut by the Federal Reserve (Fed).
US President Donald Trump has once again sparked market jitters when he announced plans to impose new tariffs on several key sectors next week, a statement that has reignited international trade tensions.
At the same time, Japan's top trade representative is reportedly heading to Washington in an effort to secure an exemption from car tariffs promised in negotiations last month, another episode in the geopolitical drama that is now increasingly influencing the direction of global markets.
Meanwhile, investors were also surprised by weaker-than-expected US services sector data, with readings showing almost no growth in July.
Most companies in this sector have started to cut jobs, due to cost pressures and sluggish demand. The developments have exacerbated concerns that the Fed's dual mandate of price stability and full employment is now under serious strain, especially after Friday's jobs report also missed expectations.
Inflation Stuck, Growth Weak: Fed in Dilemma
The latest reading of the ISM Services Index shows the post-pandemic economy is getting bleaker, demand is slowing, labor market strength is starting to crack, and inflation remains stubborn, especially in the services sector.
This near-stagflationary situation limits the Fed's room for monetary policy maneuvering, as traders are increasingly confident about the possibility of policy easing in the near future.
What is certain is that the weak data for now may ensure that the Fed's tone remains dovish, but it also warns that the real economy is much more fragile than the market is expecting.
Trade Tensions Escalate Again
Trump's increasingly aggressive rhetoric on tariffs is haunting the market again:
India is planning retaliatory measures after Trump threatened to impose new tariffs on Indian exports "within 24 hours".
Trade relations between Europe and Washington are also strained, with Swiss President Karin Keller Sutter in D.C. for emergency talks following the surprise announcement of a 39% tariff last week.
Trump has also threatened to impose penalties on countries that still buy energy from Russia, including China, in a move that could disrupt global energy trade flows and commodity-linked currencies.
ECB Sends Mixed Signal, Affects Currency Flows
As the Fed looks set to cut interest rates, the European Central Bank (ECB) has signaled otherwise. ECB Governing Council member Robert Holzmann has warned against rushing to cut rates again, citing financial stability and still-high inflation in the eurozone.
Currency traders should watch the widening monetary policy gap between the US and the EU, as this could reshape the euro's strength, especially if US economic data continues to disappoint.
Conclusion: The World Faces Divided Policies, Fragmented Trade
Financial markets are now facing a double whammy:
Weakening macro data suggests a more serious than previously thought US economic fragility.
Trade uncertainty is no longer theoretical but is now having a direct impact on market sentiment and capital flows.
Central bank narratives are increasingly at odds with each other, putting global currency, commodity and equity markets in opposite directions.
For active traders, this is no time to be complacent. In an environment of monetary policy and global economic uncertainty, investment strategies need to remain flexible, data-driven and global-minded.
