ECB Polices and the Impact of U.S. Trade Policy

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – European Central Bank (ECB) policymakers are likely relieved that the new U.S. administration did not impose blanket trade tariffs, making a rate cut next week increasingly likely.

On his first day in office, U.S. President Donald Trump refrained from imposing trade barriers, with rhetoric targeting Mexico, Canada, and China, which boosted the euro and decreased oil prices. This development also lowered yields, bolstering expectations that the ECB could continue cutting rates.

Investors had recently started pricing out ECB rate cuts due to fears that a strong dollar, rising energy costs, and possible retaliatory trade measures from the EU would elevate domestic inflation, undermining the bank’s goal to achieve a 2% price growth.

Following initial concerns about universal tariffs, the market reacted positively to Trump’s comments. “Most of the comments were related to ‘America’s first’ policy, but the initial comments appear better than feared by the market,” said Mohit Kumar at Jefferies.

Kumar predicts that the ECB will cut rates by 25 basis points each in January and March, with a potential pause in April if data aligns with expectations, followed by another cut in June.

Investors are now forecasting four rate cuts from the ECB this year, a significant shift from the uncertainty surrounding a fourth move just days prior. The dollar’s steady rise since the November election influenced these predictions, as the dollar’s strength could lead to higher European inflation due to energy being priced in dollars.

Currently, the dollar index has decreased by 1.3% from its recent highs, but analysts at ING noted it could still have further corrections.

Despite the uncertainty surrounding Trump’s policies and their rapid changes, some economists argue that the ECB will continue its rate cuts even if Trump takes a tougher stance on the EU, which has maintained a significant trade surplus with the U.S.

They argue that tariffs could restrict EU growth, and any deflationary consequences could offset inflation caused by the tariffs. Nordea expressed that Trump’s policies might strengthen the ECB’s resolve to cut rates, predicting three further 25 basis points cuts from the ECB, with possibilities for even more cuts later.