Underestimate currency volatility at your peril
August 28, 2025
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6 min
Mabrouk Chetouane
Head of Global Market Strategy
Natixis Investment Managers Solutions
We all agree on the fact that since the election of Donald Trump and since ‘Liberation day’, the volatility of capital markets has increased quite significantly. But I think there is another factor that the market is underestimating when it comes to the volatility of the capital markets. This factor is the currency and probably a currency war between major countries.
Are you surprised at how tariff negotiations have played out?
When you look at the strategy of the US administration on the tariff front, it is absolutely not a surprise for us. Donald Trump was constrained to step back after one week after ‘Liberation day’ because of the reaction of the bond market and the stock market. But clearly it was, in our opinion, part of his strategy. Imposing, announcing crazy numbers inorder to get exactly what he wants. At the end of the day, it is a success for Donald Trump and for the US administration.
When you look at the revenue generated by these custom duties, we have reached in June, for example, USD27 billion , while in 2024 the custom duties have generated USD82 billion for one year. So definitely Trump is imposing these tariffs to the rest of the world in order to finance its fiscal policy, and so far we can say this is a success. Can we say that this chapter is over? I don't think so. Negotiation will continue to take place with China, with some countries in Europe. We think about, for example, Switzerland, and clearly we have some specific sectors - the healthcare sector, for example, is under the spotlight - and this chapter of the tariffs is not over so far. But definitely Donald Trump will maintain huge pressure in order to get exactly what he wants.
Where do you expect the Fed funds rate to be at the end of 2025?
The question mark for the Fed is where the inflation will be in the second half of the year in the US. So the problem is that these tariffs were supposed to increase massively inflation, given the numbers we have seen imposed by the US administration. However, so far, inflation is not there, not yet. So the point is the US economy, we need to be reminded of the fact that the US economy is declining. We're not saying that the US economy is collapsing, but clearly the GDP growth rate is expected to be divided at least by two compared to what we have seen last year. So, clearly, in that context, you cannot have the same level of inflation. Second thing, clearly the labor market is also decelerating in the US. When you look at the statistics, when you look at the data on the manufacturing sector, for example, this sector has destroyed jobs over the past three months.
So there is something taking place in the US. The labor market is declining and the inflation rate is not as high as we can anticipate after the increase in tariffs. So in that context, when we bear in mind the fact that there are two objectives in the reaction function of the Fed - inflation and full employment rate - clearly the Fed will choose to defend the labor market in the second half of the year, meaning that we do expect at least two or three rate cuts by year end. The Fed could add another 50 basis point rate cut in September, equaling what we saw last year in 2024, in September, when the Fed decided to introduce this jumbo cut, or the Fed can decide to implement three successive 25 basis point rate cuts from September to December. But definitely the Fed will start to lower interest rates in September.
What is your outlook for Europe?
When it comes to Europe, the consensus is underestimating the economic activity for Europe for this year in the sense that the consensus is expecting only 1% GDP growth for this year while we are expecting 1.3% for this year. Where does it come from? Where is this difference coming from? The first factor that we need to bear in mind, which is extremely important, Germany has left recession and Germany will see its economy being supported by an additional fiscal policy that is about to be implemented in Germany.
When you look at the situation in Italy. Italy recorded a contraction of its GDP growth rate in the second quarter. But we do think that this is due to temporary factors explained by the volatility introduced by the US administration via the tariffs. When it comes to Spain, Spain is still the engine of the European growth rate. When you look at the numbers of the Spanish economy they are pretty good and even stellar when compared to the US economy, for example.
So definitely we are in an environment where there is heterogenity within the European economies. But the slowdown of the GDP growth rate in Q2 is, in our opinion, temporary. We do expect a recovery, and this is why there is clearly a good chance we will see consensus expectations being beaten by the European business cycle.
Is there a macroeconomic factor which markets are underestimating?
We all agree on the fact that since the election of Donald Trump and since liberation day, the volatility of capital markets has increased quite significantly. But I think there is another factor that the market is underestimating when it comes to the volatility of the capital markets. This factor is the currency and, probably, a currency war between major countries. We need to bear in mind something quite important. The US administration has imposed massive tariffs against the major emerging economies, Brazil, India, China and, to a certain extent, Russia via sanctions. So in that context, all these many economies are attacked by the US tariffs and they can react by playing with their currency, which will introduce more volatility to the capital markets and deteriorate, definitely the horizon of the investors. So if we have to manage both the volatility on the stock market and the bond market, plus the volatility that is coming from the FX market, investors could be definitely lost in translation in this context and try to find hedges.
