Economic disparities emerging: Trump's economic doubts versus EU's growth expectations
The global economy is navigating through a period of significant change, with currency markets and trade policies at the forefront of the turbulence.
The US dollar's weakness is expected to persist, as speculative accounts reduce their long positions in favour of the Euro. This shift is driven by doubts about the long-term reliability of US Treasuries due to Donald Trump's trade policy turmoil and open antagonism towards Jerome Powell, the Chair of the Federal Reserve.
In contrast, the EU has managed to weather trade policy upsets, with GDP growing from 0.2% in Q4 last year to 0.4% in the first quarter of this year. The EU has been subject to several tariffs, including 25% on steel and aluminium since March 12, 25% on cars and light trucks since April 3, a 10% universal tariff since April 5, and 25% on car parts since May 3.
The US dollar's depreciation may be viewed as an acceleration of an unavoidable trend, as the real effective exchange rate (REER) shows that the US dollar has been overvalued by more than 20% since 2021. Investors have fled risky assets, fixed-income markets, and the US dollar due to the trade policy turmoil.
In the midst of this, the Federal Reserve policy remains an anchor for the US Treasuries market. However, the Fed is anticipated to lower rates in response to slowing growth, which will add to the volatility in growth rate projections. The White House and the Federal Reserve will continue to face additional risk due to these disruptions.
The EU's new government, despite a weak mandate, is aiming to secure long-term growth with an ambitious fiscal package. A recent survey released by the European Commission indicated that demand is the main factor limiting business growth in the EU, particularly in the industrial sector. Optimistic forecasts suggest that Germany's recent fiscal package will boost economic activity in Q4 of 2025 and continue into 2026.
The Trump administration's new trade policy is causing disruptions in domestic and international markets, drawing comparison to the UK's episode under Liz Truss, with both caused by policy interventions instead of exogenous macroeconomic shocks. The Trump administration's eagerness to allow US dollar depreciation signifies a deeper policy regime change that prioritises the competitiveness of domestic manufacturing over investment.
In the wake of these changes, the European Central Bank (ECB) is expected to lower its terminal rate. CIB has changed its anticipated ECB's terminal rate to 1.5%, with three 25bps cuts expected over the next three ECB meetings. This will result in a 75bp reduction in 2025, reaching a terminal rate of 2.75% next year. With services inflation set to normalize and headline inflation falling below 2%, the ECB is expected to reach a terminal rate below the neutral level (estimated between 2.25% and 1.75%).
In an effort to understand these market repercussions, a webinar on CIB's website discusses the implications of the new policy regime coming out of Washington. Participants include Bastien Aillet, Economist Germany & Eurozone, Benoît Gerard, Rates strategist, Nordine Naam, Forex strategist, Cyril Regnat, Head of Research Solutions In the EU.
As the global economy continues to adapt to these changes, it is clear that currency markets and trade policies will play a crucial role in shaping the economic landscape for years to come.
