Behind the Trump–Powell Conflict. Scenario: EUR/USD.

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Markets Refocus on the United States — But Not Because of Trade Wars

Market attention has once again shifted toward the United States — not because of trade wars, but due to a far more dangerous trend: direct political pressure on the Federal Reserve from the White House. President Donald Trump is doing what his predecessors long avoided — systematically interfering with monetary policy, all against the backdrop of extreme inflationary tension and an overheated stock market.

📉 Unprecedented Pressure

On Friday, immediately after the release of strong U.S. labor market data for May, Donald Trump once again lashed out at the Federal Reserve, publicly calling on Chair Jerome Powell to slash interest rates by a full percentage point. This was not an isolated outburst, but rather a continuation of a growing campaign of political pressure on America’s central bank.

At first glance, this might appear to be an emotional reaction to positive economic news. But behind these statements lies a deliberate communications strategy. According to the Political Pressure Index on the Fed, developed by Bloomberg Economics, Trump is not merely expressing opinions — he has become the most aggressive president in modern history in terms of publicly attacking the Federal Reserve.

The chart (FIG.1), in which red bars reflect statements undermining central bank independence, visualizes the unprecedented frequency and intensity of Trump’s rhetoric. Neither Obama, Bush, nor Clinton ever came close to this level of interference in monetary policy.

But the issue is not just volume. What matters is the narrative: if the economy slows — Powell is to blame for his “stubbornness.” If the stock market corrects — the Fed is once again at fault. This creates a new political reality in which the central bank cannot act without the risk of being accused of sabotaging growth.

This pressure violates a core principle of modern monetary policy — the independence of the central bank from short-term political influence. It is this very principle that has sustained confidence in the dollar and the stability of the American financial model for decades.

Today we are witnessing a shift from institutional balance to personalized political targeting, with the Fed no longer viewed as an arbiter but as a convenient scapegoat. The consequences could be long-term and systemic:

  • Erosion of investor trust in the Fed’s predictability.

  • An increase in political risk priced into dollar-denominated assets.

  • The potential for future clashes between markets and the administration — especially in an election year.

Most importantly, if the Fed caves and cuts rates, it will be seen as a surrender of independence to populist pressure. And if it doesn’t — it will be blamed for “betraying” the American economy.

📌 In essence, this is not a spontaneous political outburst — it is a calculated component of a systemic campaign, in which monetary policy becomes a battlefield for control over the economic narrative.

🌀 The Institutional Trap

Here lies the central paradox of the current situation: the more aggressively Donald Trump pressures Federal Reserve Chair Jerome Powell, the less room the Fed has for independent decision-making. The central bank is no longer just under scrutiny — it is becoming politically dependent on the expectations of the White House and how its actions are interpreted by the markets.

If the Fed now chooses to ease monetary policy, markets and international observers will perceive it as an act of capitulation to political pressure. This is not just a “policy misstep” — it would be a blow to institutional trust. In the eyes of investors, the Fed would no longer appear as an independent arbiter, but as a subordinate to executive power.

On the other hand, if the Fed maintains a strict course despite slowing growth and tariff-related pressure, it automatically becomes the scapegoat for all economic difficulties. The presidential narrative is already being shaped: “If the economy slows, it’s not the White House’s fault — it’s the Fed’s stubbornness.”

This is the very definition of an institutional trap.
Every decision becomes grounds for blame. Every inaction is seen as weakness. Every move becomes a political act — even if driven by sound economic logic.

📌 What’s at Stake

This is no longer just about interest rates, inflation, or stock market dynamics.
What’s at stake is the reputation of the Federal Reserve as an independent, apolitical center of macroeconomic stability. That means:

📉 Loss of trust from global investors
📊 A rise in the political risk premium on dollar-based assets
💵 A potential acceleration of de-dollarization, driven by the politicization of the U.S. currency zone
🏛️ Most importantly — a dangerous precedent: if the Fed yields now, future presidents may feel entitled to interfere with monetary policy at will

🧠 Why This Matters

The Federal Reserve is one of the last institutional anchors of U.S. stability — especially in times of crisis. Whether during the Great Depression, World War II, or the global financial meltdown of 2008, it was the Fed’s independence that allowed it to make fast, technically sound decisions based on macroeconomic realities rather than political expediency.

If that independence is lost, the United States risks losing one of the core foundations of trust in its financial system — both domestically and globally.

📢 This is not a fight over interest rates — it’s a fight over the rules of the game. If the Fed loses this battle, it won’t just be the central bank that suffers — it will be every participant in the global dollar system.

💥 Tariffs and the Inflationary Time Bomb

Amid mounting political pressure on the Federal Reserve, a particularly alarming imbalance is emerging between U.S. trade policy and price dynamics. While trade wars with China, Mexico, and the EU were once viewed as instruments of geo-economic bargaining, they’ve now faded into the background — overshadowed by a far more dangerous phenomenon: persistent inflation.

The old narrative — that tariffs protect domestic industries and workers — no longer holds. In reality, tariffs have become a domestic inflation engine, disrupting global supply chains, increasing costs, and eroding margins in both manufacturing and retail sectors.

📉 Real-world examples:

  • PVH Corp. — the parent company of Calvin Klein and Tommy Hilfiger — lost 18% of its market cap in a single day after revising its annual outlook due to “tariff pressure on supply chains.”

  • Companies across the spectrum — from global brands to industrial suppliers — are now forced to pass rising production costs onto consumers, triggering the very inflationary impulse policymakers are trying to contain.

🔥 Tariffs = Inflation

Yes — and the data confirms it.

Despite headline CPI slowing to 2.3% YoY in April, consumer expectations are rising again. According to the University of Michigan’s survey, Americans now forecast inflation at 6.6% over the next year — the highest level since 1981.

📌 Why this is critical:

  • Rising expectations → Wage pressure

  • Wage growth → Higher production costs

  • Higher costs → Price increases

  • Price increases → New wave of expectations

This is the classic inflation expectations spiral.
When inflation becomes an anticipated norm — rather than a reactive event — it slips beyond the control of monetary policy.

🧨 A Time Bomb with a Delayed Fuse

Tariffs alone rarely cause a sudden spike in prices.
But combined with:

  • Rising logistics costs

  • Weak global supply chains

  • Political pressure on central banks

  • An overheated labor market

…tariffs act as a long-term inflationary amplifier.

It’s no coincidence that Larry Fink (CEO of BlackRock) called tariffs “an inflationary time bomb.” Their effects are not immediate, but cumulative — showing up over 3–6 months in earnings reports, consumer strain, and structural shifts in the market.

📊 What This Means for the Market

📈 Traders will focus less on current inflation and more on expectations.

💹 Instruments like TIPS, gold, and inflation derivatives will become increasingly in demand.

🔁 Stocks of companies with high export/import dependency will enter the risk zone.

📉 “Consumer pressure” sectors — retail, fashion, electronics — will be the first to lose ground.

📌 The irony is striking: a policy marketed as “supporting the American producer” may ultimately erode the purchasing power of the American consumer.

Inflation under tariffs isn’t a side effect.
It’s the main mechanism for redistributing value, loss, and political accountability.

📊 A Market on the Edge

The U.S. stock market increasingly resembles a bridge suspended over a geopolitical and macroeconomic abyss. On the surface, the numbers still inspire confidence: the S&P 500 is up 2% year-to-date and trading near its February highs.

But beneath this momentum lies a deep dissonance between expectations and reality.

The P/E ratio for the S&P 500 is 21.4, while the 10-year average is 18.7.
This implies that markets have already priced in a positive scenario: controlled inflation, steady growth, and an accommodative Fed.

But the underlying economy is diverging from those expectations.

⚠️ Why This Is Dangerous

Any negative surprise can shatter the market’s structure almost instantly.

  • Layoffs

  • Downgraded earnings forecasts

  • Rising costs due to tariffs

All of this could erode the built-in optimism.

Companies — particularly in vulnerable sectors (retail, manufacturing, logistics) — are already being forced to revise forward guidance. And this process is accelerating.

Meanwhile, the Fed is being held hostage by political narratives.

If inflation rises again and consumer spending weakens, the central bank will have no choice but to respond.

But any rate movement — up or down — will be interpreted through a political lens, especially under pressure from the Trump administration.

💡 The Core Risk Is Not a Recession
It’s a loss of faith in institutional control over the market.

Stock indices today are driven less by fundamentals and more by behavioral momentum.

One sharp correction is all it takes to trigger stop-losses, margin calls, and a cascade of volatility.

That volatility then starts a feedback loop:

Drop → Panic → Capital flight → Liquidity stress

🔍 Who’s at Risk?

  • Companies with high valuations and weak earnings (P/E > 40)

  • Stocks dependent on consumer demand: from retail to housing

  • The financial sector, where unstable rates disrupt core business models

  • The tech sector, which loses investors quickly in tightening liquidity due to its sensitivity to future earnings

📌 Investors and traders must ask themselves:
“Is the current rally fundamentally justified, or is it built on expectations that won’t survive the next round of macro data?”

So far, the S&P 500 continues to climb — but it’s a momentum-driven rally, not one grounded in conviction.
At a time when policy, inflation, and the central bank are in open conflict, the market is no longer standing on three pillars — only one remains: hope that things will somehow work out.

📢 But the market doesn’t trade on hope — it trades on confidence.
And that confidence is starting to fade.

🔍 What’s the Hidden Strategy?
I don’t believe this is a random sequence of decisions. What we are witnessing is a strategic assault on the independence of the Federal Reserve. Politically, Trump wins in any outcome:

  • If rates aren’t cut — Powell is to blame.

  • If they are cut — Trump “forced” the Fed to save the economy.

  • If the economy slows — blame the central bank.

Add to this mix: tariffs, resurgent inflation, weakened institutions — and we get a redistribution of systemic risk blame away from the administration toward “external forces.”

🧭 What Does This Mean for Traders? New Game — New Rules

For active investors and traders, we are entering a phase where volatility is no longer the exception — it’s the baseline.
This isn’t just instability — it’s a change in the logic of price movement.

🛑 The old rule, “The Fed will always rescue the market,” no longer applies.
The central bank is now paralyzed by political pressure.

🔥 Inflation is once again driving markets.
Playing CPI/PPI data is now as critical as non-farm payrolls.

🎭 Geopolitics has given way to domestic politics.
The biggest risks no longer come from Beijing — they come from Washington.

📉 What to Do? Tactical Playbook:

🔸 Trading inflation expectations

  • Use CPI/PPI releases as triggers for short-term speculation in indices (S&P 500, NASDAQ) and gold.

  • Track changes in interest rate futures — they quickly reshape market expectations for Fed moves.

🔸 Switch to defensive assets in swing trading

  • Gold (XAU/USD) and TIPS ETFs should return to favor.

  • Short-duration bonds for better risk management.

🔸 Trade volatility spikes

  • Rising VIX makes volatility trades via index options (e.g., SPX) or VXX/UVXY attractive.

  • Fed/Trump-related headlines trigger instant reactions — especially in FX and gold.

🔸 Tariff theme and earnings reports

  • Short or hedge sectors sensitive to tariffs (retail, apparel, logistics).

  • Watch for earnings downgrades due to rising import costs — expect sharp post-earnings moves.

🔸 Alternative FX pairs (Forex)

  • Sharp swings likely in USD/JPY, USD/CAD, EUR/USD — depending on Fed rhetoric and rate expectations.

  • New opportunities in cross-pairs due to diverging central bank paths (e.g., EUR/CHF, GBP/JPY).

⚠️ Bottom Line:
Volatility is now the base case, not a black swan. For traders, this is a window of opportunity:

  • Decision speed is critical.

  • Your edge isn’t the asset — it’s your reaction.

  • The focus isn’t on the trend — it’s on the moment.

📌 The market has become a political arena, and the trader is a player with limited time.
Don’t analyze consequences — trade the expectations.

📈 EUR/USD — Scenario Analysis (Q2–Q3 2025)
Focus: U.S. inflation, pressure on the Fed, fiscal instability, ECB–Fed divergence

🧭 Base Case Scenario: EUR/USD in the range 1.0880–1.1180 (Probability ~60%)

🔹 Macro Fundamentals:

  • The Fed holds rates steady despite Trump’s pressure, due to inflation fears and the risk of political optics surrounding monetary easing.

  • The ECB moves predictably — cutting rates by 25 bps while maintaining a cautious tone, as Eurozone inflation slows more gradually than expected.

  • U.S. economic data is mixed: strong labor market, but weakening consumer activity and early signs of corporate earnings deceleration.

🔹 Market Dynamics:

  • Markets don’t believe in aggressive Fed easing but also see little reason for USD strength.

  • The euro benefits from improving data out of Germany and France, and easing political risks in Italy.

🔹 Trading Zone:

  • Support: 1.0880–1.0920

  • Resistance: 1.1170–1.1200

📌 Trader Strategy:

  • Range-bound strategies via options (e.g., strangle).

  • Short USD vs. EUR on dips near support.

  • Monitor Powell and Lagarde’s rhetoric closely as key catalysts.

🔻 Bearish Scenario: EUR/USD drops to 1.0650 (Probability ~25%)

🔹 Conditions:

  • The Fed is forced to hike rates or refuses to cut through year-end due to a CPI/PPI surge and rising inflation expectations.

  • Markets interpret this as USD strength returning, triggering a safe-haven flow back into the dollar.

  • Investors rotate into Treasuries over European assets, capital outflows from the Eurozone accelerate.

  • Political turbulence in the EU adds pressure (e.g., snap elections in France or Bundestag standoffs).

📌 Trader Strategy:

  • Medium-term EUR/USD shorts via futures or options upon breakdown below 1.0880.

  • Watch 1.0720 as a key technical support.

🔺 Bullish Scenario: EUR/USD surges to 1.1350+ (Probability ~15%)

🔹 Conditions:

  • The Fed is forced to cut rates as early as summer — amid sharp economic slowdown, rising unemployment, and pre-election pressure.

  • Markets perceive this as Fed capitulation — confidence in the dollar fades among global investors.

  • Eurozone inflation slows faster than expected; ECB begins a soft easing cycle, supporting growth without overheating.

  • Capital flows return to euro-denominated assets, particularly sovereign bonds in France, Italy, and Belgium.

📌 Trader Strategy:

  • Buy breakout above 1.1220 targeting 1.1350+.

  • Use leveraged ETFs or FX swaps with positive carry against the dollar.

📊 Summary:
We are in a zone of unstable equilibrium, where fundamental macro data and political forces are balanced precariously.
However, any Fed action perceived as politically motivated could trigger USD weakening and send EUR/USD above 1.12.

📌 Recommendations for Traders:

  • Short-term: Trade the range between 1.0880 and 1.1180.

  • ⚠️ Be prepared for volatile reactions to CPI, FOMC decisions, and Trump’s statements — the market is highly policy-sensitive.

  • 🔍 Use option structures to hedge against sudden price swings, especially near Fed meetings.

 

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