Euro Slumps Ahead of Trump’s Inauguration
As the world prepares for Donald Trump’s second inauguration as U.S. President on January 20, the euro is trading near a two-year low against the dollar. This decline is largely attributed to the anticipated impact of Trump’s proposed trade tariffs on the already struggling euro zone economy.
Tariffs to Weaken Euro Zone Economy
The implementation of these tariffs is expected to further slow down the euro zone’s economic growth, prompting the European Central Bank to take drastic measures. Specifically, the ECB is likely to cut interest rates extensively to mitigate the damage. This move would aim to stimulate economic activity and prevent a deeper recession.
Fed Rate Cuts to be Limited
In contrast, the U.S. Federal Reserve is expected to take a more cautious approach. With tariffs and other policies likely to drive inflation, the Fed’s rate cuts are predicted to be limited. This divergent monetary policy approach will likely widen the gap between the euro and dollar.
Market Expectations
According to LSEG, the market is pricing in 113 basis points of ECB rate cuts in 2025, a significant difference from the 45 basis points expected for the Fed. This disparity highlights the contrasting economic outlooks for the euro zone and the United States.
A Challenging Road Ahead
As Trump prepares to take office, the euro zone economy faces a challenging road ahead. The combination of trade tariffs and potential ECB rate cuts will likely weigh heavily on the euro, making it an uncertain time for investors and traders alike.
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