European Central Bank Rate Cut Likely as Trump Trade Tariffs Avoid Europe
European Central Bank (ECB) policymakers are optimistic after the new U.S. administration avoided imposing comprehensive trade tariffs, increasing the likelihood of a rate cut next week.
President Donald Trump refrained from implementing trade barriers on his first day in office, with his threats mainly targeting Mexico, Canada, and China. This has boosted the euro, lowered oil prices, and reduced yields, strengthening expectations for continued ECB rate cuts.
Concerns about rising inflation stemming from a strong dollar, energy costs, and EU retaliatory measures had previously dampened expectations for ECB rate cuts. However, the absence of significant trade tariffs has eased these fears.
"Most of Trump's comments centered on 'America first,' but initial remarks appear more favorable than the market had anticipated," said Mohit Kumar of Jefferies. He predicts ECB rate cuts of 25 basis points in January and March, with a potential pause in April and a further cut in June.
Investors now expect four rate cuts from the ECB this year, a significant shift from previous uncertainty. The dollar's retreat from its recent highs has contributed to this change, as a strong dollar inflates European inflation.
"The dollar has room for further correction," ING stated, noting the possibility of a temporary setback once U.S. financial markets resume trading on Tuesday.
Despite the positive outlook, investors remain cautious about Trump's unpredictable policy changes. In 2019, he criticized former ECB President Mario Draghi for monetary stimulus, claiming it unfairly advantaged euro zone companies.
However, economists believe the ECB will continue rate cuts even if Trump adopts a more aggressive stance toward the EU, which has maintained a significant trade surplus with the U.S.
"Trump's policies could strengthen the ECB's resolve to cut rates due to their negative impact on euro area growth," said Nordea. "We anticipate three further 25 basis point rate cuts from the ECB, with the possibility of additional cuts."