ECB Cuts Rates As Tariffs to Hits Already Weak Growth

Forex

Economic

Summary:

The European Central Bank cut interest rates as expected on Thursday, easing for the seventh time in the past year as U.S. tariffs and faltering business confidence sap already weak economic growth.

Arguing that inflation is well on its way to the 2% target, the central bank for the 20 nations sharing the euro cut its deposit rate by 25 basis points to 2.25%, in line with the expectation of most economists polled by Reuters.

It also tweaked its language, dropping a previous assessment that interest rates are "meaningfully less restrictive", arguing instead that several factors may weigh on growth now.

"Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions," the ECB said.

"These factors may further weigh on the economic outlook for the euro area," the ECB said in a statement.

The change comes as interest rates are now at the top end of the ECB's "neutral rate", a level which neither restricts nor stimulates economic growth.

The bank has previously put this range at 1.75% to 2.25% but policymakers have downplayed the significance of the figures, arguing that it is conceptually important but not relevant to day-to-day policymaking.

Still, the bank maintained its past guidance that the disinflation process is well on track.

Financial markets still expect at least two more rate cuts from the ECB this year and some even see a third move because financial market volatility, tariffs and economic uncertainty are all likely to weaken growth and consequently inflation.

But the ECB gave little to no hint about future moves, maintaining its standard line that its next decision would depend on the evolution of incoming data and it would stick to its meeting-by-meeting approach.

Nevertheless, Lagarde, who will speak at a 1245 GMT news conference, is likely to say that the bloc is facing a large hit to economic growth and even if there is an eventual trade deal, the hit to confidence will have a meaningful impact.

She earlier predicted a growth hit of up to 0.5 percentage point, a figure that would wipe out half the bloc's expected expansion.

Lagarde is also likely to argue that inflation pressures have eased meaningfully since the ECB's March meeting, given a sharply stronger euro, a big fall in energy costs and more muted growth prospects.

She may also argue that big U.S. tariffs on China would force Beijing to dump goods on other markets, possibly weighing on prices and cutting inflation quicker than earlier thought.

Source: TradingView

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Warren Takunda

Economic

UK officials are tightening security when handling sensitive trade documents to prevent them from falling into US hands amid Donald Trump’s tariff war, the Guardian can reveal.

In an indication of the strains on the “special relationship”, British civil servants have changed document-handling guidance, adding higher classifications to some trade negotiation documents in order to better shield them from American eyes, sources told the Guardian.

The White House has upended global financial markets and torn up key relationships, with unpredictable and rapidly changing taxes on trading partners including China, the EU and the UK.

Officials were told that the change in protocols was specifically related to tensions over important issues on trade and foreign policy between Washington and London, sources said.

Keir Starmer has prioritised striking a trade deal with Washington, opting not to retaliate over Trump’s decision to impose 10% tariffs on goods exported to the US, and 25% tariffs on UK car and steel exports, instead offering concessions on areas including digital taxes and agriculture.

JD Vance said on Tuesday he believed a mutually beneficial US-UK trade deal was within reach. The US vice-president said officials were “certainly working very hard with Keir Starmer’s government” on a trade deal, adding that it was an “important relationship”.

“There’s a real cultural affinity,” Vance said. “And, of course, fundamentally, America is an anglo country. I think there’s a good chance that, yes, we’ll come to a great agreement that’s in the best interest of both countries.”

However, behind the scenes concern is growing over the vulnerability of UK industries and companies to Trump’s “America first” agenda.

Before Trump’s inauguration, UK trade documents related to US talks were generally marked “Official – sensitive (UK eyes only)”, according to examples seen by the Guardian, and officials were allowed to share these on internal email chains. This classification stood while British officials attempted to negotiate with Joe Biden’s administration, even after a full-blown trade deal was ruled out by the White House.

Now, a far greater proportion of documents and correspondence detailing the negotiating positions being discussed by officials from No 10, the Foreign Office and the Department for Business and Trade come with additional handling instructions to avoid US interception, with some classified as “secret” and “top secret”, sources said. These classifications also carry different guidance on how documents may be shared digitally, in order to avoid interception.

Companies with commercial interests in the UK have also been told to take additional precautions in how they share information with the trade department and No 10, senior business sources said. These include large pharmaceutical companies with operations in the UK and EU.

A Department for Business and Trade spokesperson said: “The US is an indispensable ally and negotiations on an economic prosperity deal that strengthens our existing trading relationship continue.”

Wider questions have been asked about whether the special relationship between the UK and US can withstand increasingly divergent policies on Russian hostility, as well as deep criticisms of Nato and defence collaboration. On trade, pressures are mounting in sensitive areas such as car manufacturing and pharmaceuticals.

Other reports suggest the European Commission has also changed its perspective on the risks of sensitive or secret information being intercepted by the US. Commission employees have been issued with burner phones if they are visiting the US, the Financial Times has reported.

So close has the UK and US position been on defence and security in recent years that secure government material is sometimes marked “UK/US only”, or given a “Five Eyes” marking, in reference to the intelligence-sharing collective made up of the US, UK, Australia, New Zealand and Canada. So far, the Guardian has only established a change in document-handling related to trade discussions.

Trump’s plan to reboot domestic industry, including in automotive and pharmaceutical manufacturing, has caused consternation among foreign governments keen to protect domestic industries and jobs while trying to strike trade deals to protect against heavy tariffs.

Trump has sought to defend his decision to put vast tariffs in place, saying there would be a “transition cost” from his policies.

The US president also said he would “love” to make a deal with China and that, in his view, he and the Chinese president, Xi Jinping, would “end up working out something that’s very good for both countries”.

In a move regarded by some observers as an attempt to soothe market reactions, including a rise in US government borrowing costs, Trump said last week that he would delay further tariffs for 90 days. The European Commission president, Ursula von der Leyen, said the EU would also delay its response to US tariffs.

Until July, the EU will face a 10% duty on exports to the US, rather than the 20% “reciprocal tariff” rate that was in force for a matter of hours, until Trump’s reversal last Wednesday. US duties of 25% tariffs on steel, aluminium and cars are still in place, however.

Despite suggestions that Trump may be chastened by the markets’ volatile response to his trade policies, the president’s incremental steps have increased duties on Chinese imports to 145%. China responded on Friday by announcing it would increase tariffs on US goods to 125%. The announcement from the Chinese commerce ministry also suggested that it would not pursue higher tariffs in any further retaliatory steps against the US, adding that “at the current tariff level, there is no market acceptance for US goods exported to China”.

“If the US continues to impose tariffs on Chinese goods exported to the US, China will ignore it,” it said, flagging that there were other countermeasures to come. Xi, meanwhile, urged the EU to resist Trump’s “bullying”.

Source: TheGuardian

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Warren Takunda

Economic

Stocks

European shares fell on Thursday, while the dollar rose as traders took some heart from trade talks between the U.S. and Japan, and gold hit a new record as Federal Reserve Chair Jerome Powell added a note of caution about the growth outlook.

With a long weekend ahead, investors were reluctant to double down too heavily on the broad-based decline in risk assets this week.

U.S. President Donald Trump unexpectedly joined talks in Washington on Wednesday with a delegation from Japan, saying later that "big progress" had been made in the discussions with lead Japanese negotiator Ryosei Akazawa, but giving no details.

Adding to the cocktail of uncertainty was the European Central Bank's policy meeting later on Thursday. The ECB is widely expected to cut euro zone interest rates, but may not offer much clarity about the effects on growth and inflation from Trump's tariffs.

The STOXX 600 fell 0.4%, as construction and healthcare shares dropped, but still headed for a 4.2% gain this week, while the euro , which is not far off three-year highs against the dollar, eased 0.25% to $1.1372.

"As the dust is starting to settle, there are concerns regarding that stagflationary outlook that Powell warned about and I think there's potential for the ECB to warn about a stagflationary outlook for the euro zone as well," City Index strategist Fiona Cincotta said.

"Those comments from Powell are quite stark," she said.

Powell, who was speaking for the first time since Trump last week paused some of his barrage of tariffs, said the Fed would wait for more data on where the economy was headed before making any changes to interest rates.

But he also cautioned that Trump's tariff policies risked pushing inflation and employment further from the central bank's goals.

"Powell is between a rock and a hard place," said Tom Graff, chief investment officer at Facet Wealth. "The Fed can't act proactively to stem any potential economic weakness, given that tariffs are likely to also cause inflation."

U.S. stock futures rose, suggesting a recovery after Wednesday's selloff that pushed the S&P 500 down 2.2% and the Nasdaq down more than 3%. Futures on the Nasdaq were up 1.2%, while those on the S&P were up 1%, as technology shares got a boost from forecast-busting earnings from Taiwan's TSMC.

The ECB is all but certain to cut interest rates for the seventh time in a row today as it aims to shore up the European economy after

Results from TSMC, the world's largest contract chipmaker, followed warnings from bellwethers Nvidia and ASML that rattled investors.

Dutch company ASML said tariffs were increasing uncertainty around its outlook for 2025 and 2026, while AI pioneer Nvidia warned of a $5.5-billion hit after Washington restricted exports of its AI processor tailored for China.

The dollar has been a major casualty from the uncertainty stemming from both the rollout of the tariffs and their impact on economic growth. Investors have ditched U.S. stocks and bonds in the last couple of weeks.

Against a basket of six other currencies, the dollar has fallen to its lowest in three years this month. Treasuries have been relatively stable. The benchmark U.S. 10-year Treasury yield was up 4 basis points at 4.32%.

The yen touched a seven-month high earlier in the session before reversing to trade 0.8% weaker at 142.945 per dollar after Akazawa said foreign exchange had not been discussed at the trade talks in Washington.

In commodities, gold racked up yet another record high, going as high as $3,357.40 per ounce as safe-haven flows and an exodus from the dollar gathered pace.

Oil prices rose on the prospect of tighter supply, leaving Brent crude futures up 0.7% at $66.33 a barrel.

Source: Reuters

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Warren Takunda

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The Pound to Dollar exchange rate remained buoyant near six-month highs on Thursday, while GBP/EUR steadied near 18-month lows, with Sterling helped overall by a confluence of progress in trade talks with the US, a weaker US Dollar and earlier management of the Chinese Renminbi.

GBP/USD was trading near its highest since October 02 in European morning trade after being helped on Wednesday by reports that a tariff agreement with the US may be only three weeks away, broad losses for the US Dollar and constructive central parity fixes for GBP/CNY rate in the first half of the week.

“The rates market is pricing in a very tiny chance of greater than 25bps [rate cut from the Bank of England] on May 8. GBP/USD is still quite elevated and finally outperforming the EUR/USD this week,” says Brad Bechtel, global head of FX at Jefferies, in Wednesday market commentary.

“Perhaps the market is getting excited that the UK will have a trade deal before the EU. The EU vs. US negotiations are likely to be rockier than UK and US but not nearly as bad as US and China. Sounds like a deal on the UK could happen quite soon,” he adds, and suggests "its mostly GBP pushing the DXY lower now." Pound Sterling Aided by US Trade Talks, Weaker Dollar, Renminbi Management_1

Pound Sterling Aided by US Trade Talks, Weaker Dollar, Renminbi Management_1

Above: GBP/USD at daily intervals with Fibonacci retracements and selected moving averages highlighting possible areas of technical support. Click for closer inspection.

GBP/EUR steadied above its recent 18-month lows on Thursday, meanwhile, having fallen alongside the US Dollar on Wednesday when currencies of current account surplus jurisdictions outperformed, with much now set to be determined by an imminent European Central Bank interest rate decision.“In the current state of things, the FX market is not looking much at short-term rate differentials. If it did, EUR/USD should be trading well below 1.10,” says Francesco Pesole, a strategist at ING.

“While we cannot exclude the possibility that markets can take the opportunity of an ECB cut to take profit in crowded EUR longs, the news from the US is still hitting the dollar, and the highly liquid euro remains in a prime position to benefit from the rotation,” he adds in Thursday market commentary.

GBP/EUR unwound all of its prior rally on Wednesday but was supported by tightened limits enforced in EUR/CNY, and EUR/USD, from Beijing. These prevented EUR/CNY rising above 8.3424 and led to suppressive pushback around 1.1387 in EUR/USD, levels which rose to 8.4119 and 1.1513, respectively, on Thursday. Pound Sterling Aided by US Trade Talks, Weaker Dollar, Renminbi Management_2

Pound Sterling Aided by US Trade Talks, Weaker Dollar, Renminbi Management_2

Above: GBP/EUR at daily intervals with ICE US Dollar Index.

Source: Poundsterlinglive

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Glendon

Forex

Economic

President Donald Trump on Thursday again called for the Federal Reserve to lower rates and even hinted at the "termination" of Chairman Jerome Powell.

In a Truth Social post, Trump said:

"The ECB is expected to cut interest rates for the 7th time, and yet, 'Too Late' Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete 'mess!' Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell's termination cannot come fast enough!"

Indeed, the European Central Bank has been cutting rates as it tries to boost growth in the region. The ECB is expected to lower rates again later on Thursday.

The post comes a day after Powell delivered a speech at the Economic Club of Chicago in which he noted that the administration's tariffs put the central bank in a tricky spot as it decides whether to tame inflation or boost growth.

"If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close," Powell said. Those comments contributed to a steep sell-off on Wednesday.

This isn't the first time Trump has criticized Powell's approach to U.S. monetary policy. Trump posted on April 4, two days after the administration's "Liberation Day" tariff announcement, it would be "a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always 'late,' but he could now change his image, and quickly."

However, it's the first time Trump has explicitly called for Powell's firing. Powell has also said the president doesn't have the power to fire him, noting that it's "not permitted under the law."

Powell's term as Fed chairman ends in May 2026.

Source: CNBC

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Warren Takunda

Economic

A few weeks on from Washington’s first wave of tariff announcements, international trade data points to a subdued outlook, with key indicators signalling serious risk of trade diversion to Europe as a result of the disruption in trade between US and China, according to the World Trade Organization (WTO).

The WTO's “Global trade outlook” released on Wednesday found decoupling Chinese and US economies would lead to an 81% plunge of merchandise trade between both countries in 2025 and 91% without the recent exemptions granted by the US administration for products such as smartphones.

As a consequence, the report foresees an increase of 6% of Chinese exports to Europe. But Europe, hit too by US tariffs, will also look for other markets for its exports, the WTO says.

“This is a two-way street, there will also be some European exports diverted to other economies,” WTO Chief Economist Ralph Ossa claimed, adding: “Think about the high tariffs that are in place on motor vehicles for example. This is a way through which these tensions could potentially propagate.”

The US has imposed 25% tariffs on EU cars, steel and aluminium. US tariffs of 10% apply also to other EU exports.

The tensions between China and the US has been escalating with Chinese exports to the US being hit with 145% tariffs and US goods to China facing 125% tariffs.

More generally, Chinese merchandise exports are projected to rise by 4% to 9% across all regions outside North America, according to the report’s forecasts.

Lessons will have to be learned, WTO Director-General Ngozi Okonjo-Iweala said about the world trade disruptions as she announced a decline by 0.2% of the volume of world merchandise trade in 2025, which amounts to nearly three percentage points lower than expected.

“One of the clearest lessons of the COVID-19 crisis is the importance of diversifying sources of supply. Today’s trade tensions remind us that we must also diversify demand,” she said, adding: “Overconcentration, whether it is where we buy from, or where we sell to, leads to over dependence, making economies more vulnerable to shocks and fostering a sense of unfair burden-sharing.”

The report said that the decoupling between US and Chinese economies will contribute to a broad fragmentation of the global economy along geopolitical lines in two isolated blocs.

It will also have an impact on the world GDP. “Our estimate is that global world GDP would be lowered by nearly 7% in the long term,” Okonjo-Iweala said.

Source: Euronews

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Michelle

Economic

Forex

Central European currencies held stable on Thursday while stocks firmed as markets were looking ahead to a rate meeting by the European Central Bank later in the day.

The ECB is expected to cut interest rates for the seventh time in a year on Thursday, looking to prop up an already struggling economy that will take a large hit fromU.S. tariffs.

While U.S. PresidentDonald Trumphas paused most of the heftiest tariffs, many remain in place and volatility in financial markets has already done damage.

"CEE currencies will be looking to the ECB meeting today, but that should confirm the current market stance and not show much change for CEE," ING wrote in a note.

"Still, we believe the ECB will be an important benchmark for CEE central banks as they face U.S. tariffs and the deteriorating economic outlook," ING said.

Hungary's forintwas little moved, trading at 407.65 per euro, moving away from a near three-month-low hit on Monday.

"The forint has stabilised. The EUR/HUF exchange rate is trading below the short-term resistance level of 408.50, while the next significant support is seen at 405. ... however, this afternoon’s ECB interest rate decision could stir up fresh movements in the currency market," brokerage Equilor wrote.

The forint was helped this week by comments from incoming Central Bank Deputy Governor Zoltan Kurali who said on Tuesday that the bank must maintain a positive real interest rate to ensure both financial market and price stability.

The Polish zlotywas stable, halting losses after slipping to a four-and-a-half month low in the previous session. The currency traded at 4.2815 versus the euro.

"The EUR/PLN rate may move in the range of 4.26-4.30 in the near future. The day will be dominated by the meeting of the European Central Bank, and the expected cut will support market rates at low levels," Bank Millennium wrote.

Earlier this month, Poland's central bank governor Adam Glapinski said interest rates could be cut as soon as May if incoming economic data supported the easing of inflation pressures. Borrowing costs in Poland have remained unchanged since October 2023.

The Czech crownwas a touch weaker, trading 0.05% down versus the euro at 25.03.

Stocks were higher, with Warsaw's equitiesleading gains as the index added 1.4%. Budapestwas up 0.1% while Pragueadded 0.3%.