The impact of tariffs on growth and inflation will drive divergence between the Fed and the ECB. Growth and inflation forecasts in light of the result of last week’s US elections are being updated, note macroeconomic analysts at ABN AMRO.
Fewer Fed cuts, more ECB rate cuts
“Although the election count has not been fully concluded, the Republican Party appears to be on track to win the majority in the House of Representatives, along with the presidency and the majority in the Senate. By controlling all three branches of government, President Trump “has therefore significant power to implement its political platform.”
“It remains very uncertain how far Trump will go with his tariff plans, so naturally there is a lot of uncertainty around our new forecasts. But overall, the main results of the plans are likely to be: 1) growth and inflation in the eurozone much lower than our previous baseline 2) significantly higher inflation in the US and, ultimately, lower growth.”
“This combination will likely mean fewer interest rate cuts by the Fed, but more rate cuts by the ECB; this, in turn, will continue to weigh on the euro, which has already weakened significantly in recent weeks to as markets moved to price in a Trump victory.”
Source: Fx Street
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