In Frankfurt on January 21, European Central Bank policymakers likely breathed a sigh of relief as the new U.S. administration refrained from imposing the feared blanket trade tariffs. Consequently, a rate cut next week now appears certain.
U.S. President Donald Trump focused his trade barriers on Monday primarily on Mexico, Canada, and China, avoiding Europe and easing concerns. This resulted in the euro rising, oil prices falling, yields decreasing, and reinforcing expectations of ECB rate cuts.
Investors had anticipated adverse outcomes, including universal tariffs, and were reassured by the restrained rhetoric. Mohit Kumar from Jefferies noted that the initial comments were more favorable than expected by the market.
Kumar predicted rate cuts of 25 basis points in January and March, with a potential pause in April if data aligns with expectations, followed by another cut in June. Market sentiment has shifted to fully incorporating four ECB rate cuts this year, contrasting with previous uncertainty.
Due to the dollar's strength potentially escalating European inflation, investors closely observe currency fluctuations. While the dollar index has slightly declined, further correction remains a possibility in the short term.
The market acknowledges the unpredictability of policy shifts under Trump, who has previously criticized ECB monetary policies. Despite potential challenges from a hardened stance on the EU, economists suggest that the ECB may persist in cutting rates to counter deflationary repercussions of weakened economic growth caused by tariffs.
Nordea anticipates three additional 25 basis points rate cuts by the ECB, with a possibility of this trend continuing for an extended period due to potential adverse impacts of Trump's policies on the euro area growth outlook.