European Central Bank to Cut Rates Again with Trump Threat and Us Divergence in Focus

The European Tentral Bank is widely expected to kick off its 2025 meetings with another interest rate cut on Thursday, as traders aim to gauge to gauge to gauge how far the central bank is willing from

Money Markets on Wednsday Wicing in 35 Basis Points Worth of Rate Cuts for the January Meeting, Indicating The Euro Zone’s Central Bank Will Cut by at Least ATAST ATEAST A QUARTER-Principal. That would take the deposit facility, its key rate, to 2.75% marking its fifth trim since it began Easing Monetary Policy in June 2024.

Market pricing then sugges follow-up cuts at the eCB’s march and june meetings, with a fourth and final reduction bringing the deposit facility to 2% by the end of the year.

Expectations for a Swift Pace of Easing This Year Have Solidified, even after headline Euro Area Inflation Increased for a third straight month in December. A Slight uptick in the rate of price rises was expected due to effects from the energy market, While Business activity indicators for the bloc show containued Weakness in Manufacturing and tepid consumer confidenceEconomists pollled by reuters are expecting fourth -Quarter Growth Figures to Show GDP expanding just 0.1%, down from 0.4% in the third Quarter.

While this week’s ecb rate move is Near Guaranteed, Several Key Questions Remain that its President, Christine Lagard E Relate to the US and Its New Leader.

One concern is whether the eCB is comfortable with the increase distance business Hold Rates on WednsdayMarkets are pricing in just two quarter-point rates from the fed this year, as Projected by fed members in December.

Some strategists sugges the fed Could Enact Just One CutAnd at the very least tread water as it awaits more detail on President Donald Trump’s ACTUUL Policies Versus His Extreme Trade Threats and their potential inflationary impact,

LAGARDE ACKNOWLEDGED That Divergence in an interview at the World Economic Forum Last Week, Telling CNBC That it was the result of different economic environments. While the Euro Area Has Fallen Into Stagnation, The Us Economy has Continued to grow at a solid clip in the higher interest rate environment, and many investors are Optimistic on the 2025 outlook Despite Trump Uncertainty.

“We have to look at a differentiation here through the lens of growth and the spare capacity that is building up in the us we have an economy that’s performing strongly and rapidly … We can sleep Euro Zone, “Sandra Horsfield, Economist at Investec, Told CNBC’s” Squawk Box Europe “on Wedns.

“That divergence does mean that inflationary pressures are more likely to be sustained for some time in the us,” She said, leading her to forecast one more fed cut Followed by a pause, and a great for cuts in euroope.

This reinforces expectations that the euro could be Pulled Back to Parity With the greenback and sugges even further strength for an Alredy-Mighty Us Dollar In 2025. That matters for the eCB, because a weaker currency incurses the cost of important goods, even if the central bank’s bigger concerns right nolate to domestical-generated sevricles and wage.

Lagarde downplayed the impact of this effect, Telling CNBC The Exchange Rate “Will be of Interest, and … May Have Consequences.”

However, She also said she was not concerned about the import of inflation from the us to europe and continues to expected to cool towed target. The ecb president added that bulishness around the us economy was a positive “because Growth in the us has always been able before a favorite factor for the rest of the world.”

The US President has not re-proposed his idea of ​​sweping, universal tarifs on important to the US, and is currently zeroed in on Duties Targeting China, Mexico and CanadaHowever, in a speech at the world economic forum, he Accused the European Union Of treating the us “very unfairly” on trade, pledging: “We’re going to do sometising about it.”

Trade Wars Block Disrupt Global Supply Chains and Stoke Inflation, Warranting Higher Interest Rates at the ECB, Said George Lagarias, Chief Economist at Forvis Mazars.

“Inflation and rate risks are definitely on the UPSIDE” for the Euro Zone, He Told CNBC by email.

“Eu Company Selling Price Expectations have Flattened and Show an upward tendency. Om the eCB could Risk Flight of Capital Towards the dollar, “He added.

On the Possibility that the ECB BIGGER HALF-point rate cut, he said: “IF we do not do do a sharp rate cut, it would mean the boards seeks to protect in the core of the euro zone, and make sure That political uncertainty in France and Germany Or a loose fiscal policy in italy do not cause a precitous risk in borrowing rates. “

Bas van geffen, Senior Macro Strategist at Raboresearch, also said he was “Less optimistic when it come to the influence outlook than the eCB is, or markets appear to be,” Forecasting a Fall in Rate. .

“When the ecb incorporates Trump Tariffs in their baseline scenario, we would expect higher inflation forecasts on their part too,” He Told CNBC.