Secondly, the European Commission (EC) is preparing to announce tit-for-tat tariffs on US products. This action follows President Donald Trump’s implementation of a 25% blanket tariff on cars coming into the US. The announcement, as yet unconfirmed but anticipated within days, would represent the most serious and costly step yet in the burgeoning trade hostilities between the two economic giants. The EC’s proposal should be viewed against the backdrop of increasingly unstable markets and fears of increased inflationary pressures.
EC spokesman Olof Gill confirmed the commission’s plans, stating that the retaliatory measures would be “timely, robust, well calibrated and will achieve the intended impact.” President Trump again jumped into the fray on Wednesday when he announced new auto tariffs. These tariffs are scheduled to begin on April 2. Waves from this decision have already started to shake global markets, sending stocks in car and auto parts manufacturing companies tumbling.
Financial markets are preparing themselves for heightened volatility, as The Kobeissi Letter pointed out in a recent post on X. The original post cautioned that most will perceive the new tariffs as welcome relief from uncertainty. It doesn’t shy away from forecasting that market volatility will persist. That’s why analysts are sounding the alarms as the US prepares to impose these reciprocal tariffs. They argue that this step would dampen economic growth around the world and exacerbate inflationary pressures.
“We regret 25% auto tariffs and a new suite of measures coming on April 2, but we are preparing for all of these.” – EC spokesman Olof Gill
The negative impacts of these tariffs are already reverberating through the foreign exchange markets. On Friday, the EUR/USD exchange rate fell down to around 1.0775. Yet still, it soon found support at the 20-day Exponential Moving Average (EMA), selling off at about 1.0760. EUR/USD rebounded sharply after hitting an intraday low of 1.0765 in the aftermath of the US Personal Consumption Expenditures (PCE) inflation data for February. It remains subject to erratic shifts within a tight range under 1.0800 as the day unfolds.
Moreover, our new core PCE inflation—excluding volatile food and energy—rose at a 2.8% annualized rate. That increase topped Wall Street’s projections of 2.7% and January’s 2.6% advance. This recent data indicates that inflationary pressures are only continuing to build, further complicating the global economic picture.
“It looks inevitable that tariffs are going to increase inflation in the near term.” – Boston Fed Bank President Susan Collins
In euro area Europe, inflationary trends constitute a much more complicated picture. Spain’s Harmonized Index of Consumer Prices (HICP) was up by 2.2%. This is a significant decrease from the past rate of 2.9%. As of March 2023, France’s Consumer Price Index (CPI) has increased non-stop by 0.9% year-over-year. This was a bit of an underperformance. Inflation expectations had called for a 1.1% rise. These numbers show dramatically different inflation paths in Europe’s largest economies.
The European Central Bank (ECB) has been actively watching these developments. Just last week, ECB Vice President Luis de Guindos recognized that the effect of tariffs would be transitory to inflation. Yet he cautioned against expecting their positive effects on growth to endure for as long.
“For growth, trade is extremely detrimental.” – ECB Vice President Luis de Guindos
President Trump’s tariff policies are fuelling fears of a continuation, if not aggravation, of precarious market volatility and risk-off aversion. These regulations have already set off panics worldwide among carmakers and their suppliers, with associated stocks losing billions in market valuation. The prospect of retaliatory actions by other nations can only complicate what is already an uncertain and dangerous economic environment.
As April 2 nears, one thing is for sure – both market participants and policymakers will be watching these developments with great interest. Our global economy stands at a historic crossroads. Severe trade tensions are rising, threatening growth and macroeconomic stability of some of the largest markets.