Key points
- Market volatility surged as President Trump threatened to impose a 25% tariff on Colombia, prompting retaliatory measures before Colombia conceded to his demands. Meanwhile, Chinese AI startup DeepSeek’s R1 model shocked global markets with its disruptive cost advantage, raising concerns about China outpacing US tech giants. These developments intensified market volatility amid Trump trade tensions and monetary policy decisions.
- On the monetary policy front, the Fed kept interest rates unchanged, with its outlook on further cuts projecting two cuts in 2025. In contrast, the ECB cut rates by 25 basis points, maintaining its dovish stance. The euro will likely come under further pressure, while the strength of the USD is expected to continue in the short term.
- Nonetheless, the notion of higher US interest rates under a Trump presidency may not be the case if the US labour market turns weaker and the US Fed continues reducing the size of its balance sheet through quantitative tightening.
- For the present, the global monetary easing cycle and Trump’s tariff policies remain the primary drivers of currency markets.
Baseline View
Notwithstanding a growing number of sources of global market volatility, central banking remains at the centre of market directionality. Differing monetary policy outlooks for the ECB and Fed will likely keep the USD strong in the coming quarters, with the ECB set to keep on cutting rates to support growth while the Fed may begin to turn more cautious.
Similar to the Fed, the SARB is also set for a policy pause, as it faces plenty of uncertainty on international front. In particular, US President Trump’s tariff proposals are the biggest source of uncertainty at the moment, which will keep central banks relatively cautious more broadly.
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