President Trump’s import tariffs on European goods may weaken the continent’s export-driven industries and, with them, the economy and the euro. According to Oxford Economics, this could contribute to a trend of depreciation in the EUR/USD currency pair in 2025 to the level of 1.04. Should such a trend get underway, the inflation scenario could feasibly heat up again, interfering with the European Central Bank’s (ECB’s) project of reducing interest rates.
This dynamic, together with the prospect of retaliatory tariffs on the part of the European Union (EU), is an indirect inflationary consequence of Trump’s tariffs. The direct impact on European consumer prices should be deflationary. Since US duties would hike the costs of European goods for American consumers, exporters in Europe would face weaker demand for their products and “plausibly will respond by trying to regain demand by lowering prices for both US and European consumers”, in the words of the European Parliament.
What worries the European Parliament more than this is the possibility the ECB will overreact to inflationary concerns through keeping rates too high, which would slow down the continent’s economic recovery. In the Parliament’s view, interest rates in Europe should continue their downward trajectory because, more than anything else, it’s necessary to stoke the fires of Europe’s economic engines.
Near the end of April this year, Olli Rehn of the ECB seemed to share this viewpoint, even though inflation was holding at 2.4% – above the central bank’s target. “My view is that if inflation is expected to fall below our 2% target, the right reaction could be to cut rates further”, he said. When the ECB convene in June, they will account more fully for the aftershocks of US tariffs, which may imply more timid growth and inflation than was predicted beforehand. If so, this would strengthen the case for a continuation in the ECB’s rate cutting project.
But has Europe really got its inflation problems under control? Join us for some more discussion, especially if you’re involved in online forex trading with the EUR/USD currency pair.
Energy Prices
During the winter of 2024-2025, the weather in Europe was cold, boosting demand for natural gas. As a result, between October 2024 and January 2025, natural gas prices ballooned from less than $2 per million British thermal units (MMBtus) to almost $4 per MMBtu.
As to crude oil prices, these surged in January due to a parting shot by former President Biden, when he bolstered sanctions on Russian oil, targeting 183 tankers for transporting it and two producers too – Gazprom Neft and Surgutneftegaz. WTI oil futures in the middle of that month were 17% higher than their level at the beginning of December, and for Brent futures it was 14% higher. Plus, leading up to January 5th, American inventories had recorded seven consecutive weeks of declines.
Consequently, there was good cause to worry about prices reheating in Europe. And this would be without any improved economic activity: On the contrary, higher energy prices would likely slow down European manufacturing. (In Germany, for instance, two years of GDP contraction have, to a large extent, high energy costs to thank. These have hamstrung the nation’s industrial prowess.) The result could be stagflation – the bitter combination of sluggish growth and elevated prices. “There is the risk”, says Kyle Rodda of Compital.com Australia, “that stronger energy prices lead to a stagflationary mix in Europe”.
As to core inflation, which excludes energy prices, this “presents an even greater concern”, wrote Validus in mid-February. “Despite some progress, wage growth and certain services inflation remains too high, and ECB members are eager to avoid a second wave of inflation”.
Looking Forward
Many European countries capped energy prices during the energy crisis of 2021-2023, but those caps are being popped. In Luxembourg, for instance, the passing of 2024 implied the total end to price caps on petroleum products, and a partial end to caps on electricity prices. Thus, even though core inflation in that nation slowed in January, this “is overshadowed by the rise in energy prices”, says STATEC—the National Institute of Statistics and Economic Studies of Luxembourg. “In January 2025, with the lifting of tariff shields (price caps), annual inflation in petroleum products will rise to 4.4% (with heating oil and gas prices increasing by 28% and 35% respectively in January compared with December 2024)”.
Another example is Romania, who were warned by the European Commission on May 7th 2025 to remove their cap on natural gas prices, even though it has held since November 2021. In the words of the Commission, “Regulated prices at the level of the EU-wide wholesale market distort price signals and effective market functioning,”
Final Thoughts
Following the suggestion of ECB board member Isabel Schnabel that the central bank should pause its rate cutting cycle, the forex trading market took note on May 12th this year and propped up the euro. Schnabel was concerned about global inflationary pressures seeping into the eurozone. As we’ve seen, the energy price scenario in Europe could be one of the strongest reasons for the ECB to take a step back from their dovish project. Thus, in spite of the European Parliament’s worry about overly hawkish ECB policy, some degree of hawkishness may indeed be necessary, at least if the eurozone is to avoid prices spiraling out of control the way they did a couple of years ago.
For the eurozone as a whole, STATEC (speaking in early February) expected energy inflation to keep accelerating, and also for core inflation to stay relatively elevated. (In their view, 2026 could see Brent crude prices surge by 13%, and electricity prices by as much as 32%.) This sort of analysis gives the ECB plenty of reason to cool their boots on the rate cutting. This would be bullish news for the EUR/USD on the forex trading floor.
