Trade tensions between the United States and the European Union are fueling short-term political uncertainty.
- We plan that the European Central Bank will suspect its rate drop at its meeting on July 24, now the deposit rate at 2.0%.
- The ECB has lowered the deposit rate of 200 base points compared to its peak last year, inflation having come closer to the objective, which has contributed to amortizing the impact of uncertainty linked to trade policy since the start of the year.
- The climbing of trade tensions between the United States and the EU remains the main short-term risk for the economy of the euro zone, in particular given the new pricing threats of the Trump administration.
- The data in the euro zone, however, rebounded after the hollows recorded in April under the effect of customs duties, while inflation returned around the objective of the ECB.
- The medium -term inflation forecasts of the ECB are perfectly balanced around the objective on the entire period, it remains sensitive to the risk of deterioration. The term interest rates markets are currently focusing on a new drop in rates within the framework of this cycle, is slightly less than our forecasts which count two.
- On a basis of relative value, we favor exposure to interest rates in the euro zone compared to those of the United States, given the macroeconomic and political context of the two economies. We also keep a preference for short positions on the US dollar compared to the euro.
The economy of the euro zone increased by 0.6% in quarterly sliding (+1.5% in annual sliding) in the first quarter, that is to say its fastest rate since the end of 2022; And this, thanks to the resumption of domestic demand and exports to the United States before the entry into force of customs duties, which stimulated the economy at the start of the year. However, the current consensus of the market for the GDP growth in the euro zone in 2025 and 2026 remains blocked around 1%, despite the monetary relaxation of last year and the budgetary relaxation of Germany, which should help support the growth prospects of the euro zone by the end of 2025 and in 2026.
The main reason that tempers the hopes of a more sustainable economic recovery in the region is the uncertainty generated by American trade policy, with the threats of President Trump to impose customs duties of 30% on EU exports from August, last salvo in the pricing iron. However, if progress is made in trade negotiations between the United States and the EU in next month and the risks of EU retaliatory measures are fading, investors could start to integrate certain risks of slowing down growth into the region.
At the same time, inflation prospects in the euro zone continue to improve, overall inflation and underlying inflation stood respectively around 2.0% and 2.3% in annual sliding, near the BCE target. This disinflationist tendency is explained by the slowdown in the increase in wages, the competitive pressures exerted by Chinese imports in the region (China redirecting its exports to the EU at the expense of the United States) and the strengthening of the Euro, which appreciated 3% from the last meeting.
After the last drop in rates in June, some members of the BCE Governors’ Council have been more cautious about any future softening of monetary policy, suggesting that the default position is now the maintenance of the status quo and that the burden of evidence is incumbent on those who wish new decreases. However, negative surprises in terms of growth (for example, trade tensions, increase in bond yields) and inflation (for example, strong euro) could materialize and switch the projections of inflation, which are currently very balanced, downwards. This would push the ECB to carry out two new decreases of 25 basic points this year, before optimism concerning the budgetary response of Europe (in particular Germany) resumed the upper hand.
We believe that the context of growth and inflation in the euro zone, as well as political orthodoxy, promote relative outperformance of European sovereign obligations compared to American obligations.
