The recent announcement of tariffs by the U.S. Administration on April 2, 2025, has resulted in a marked increase in financial market volatility, aligning closely with a sustained rise in economic policy uncertainty (EPU) observed since the autumn of the previous year.

This uptick in EPU indices, measured by both U.S. and euro area metrics, reflects growing anxieties surrounding geopolitical developments and trade policies.

Following a period of relative stability, financial market volatility indicators, specifically the VIX for the United States and the VSTOXX for the euro area, experienced significant surges in conjunction with the market's reaction to tariff implications.

Prior to March 2025, financial markets, buoyed by strong equity momentum, had displayed suppressed levels of volatility.

Over the past year, EPU indices on both sides of the Atlantic have seen substantial increases, a trend projected to persist into 2025 amid ongoing geopolitical tensions and uncertainties related to U.S. tariff strategies.

Historical data suggests a correlation between EPU and financial market volatility; however, both indices have exhibited periods of divergence, particularly following major events like the 2016 U.S. presidential election and the UK's Brexit referendum.

In the euro area, particularly in Germany and France, EPU levels have consistently remained above historical averages, with German EPU experiencing a notable rise.

By April 2025, German EPU reached unprecedented levels coinciding with the U.S. tariff announcement.

Utilizing a robust database of over 1.8 million news articles, a replicated EPU index reveals that domestic uncertainties, influenced by political and fiscal matters, alongside global uncertainties related to geopolitical issues and energy dependency, have driven this increase.

The geopolitical climate, especially in light of the ongoing conflict in Ukraine and recent escalations in Gaza, has further intensified market trepidation.

Additionally, uncertainty surrounding monetary policy has heightened in response to evolving inflation trends post-pandemic, while international trade uncertainties have been exacerbated by significant global events, including Brexit and recent U.S. trade policies.

An empirical analysis adds further insight into the dynamics between financial market volatility and EPU, particularly following the U.S. tariff announcement.

It suggests that financial market volatility is likely to be influenced by equity market momentum, which is characterized by the number of months with positive equity returns.

Data indicates that a historical disconnect between these two measures occurs during periods of strong equity performance, whereas alignment occurs when positive returns wane, as seen post-announcement.

This phenomenon may imply that heightened political uncertainty is perceived as more impactful during weaker stock market phases, compelling investors to reassess risk premiums associated with political events and policies.

The volatility response observed recently indicates a complex interplay between market sentiments and economic policy developments that continues to evolve amidst a backdrop of global economic uncertainties.