Market Update – 12th February 2025.

Speaking to European Union lawmakers on Monday, ECB President Christine Lagarde indicated that inflation in the Euro Area appears on track to reach its 2% target in the coming months. However, she warned that uncertainties stemming from global trade tensions could disrupt this trajectory, alluding to potential U.S. trade tariffs and rising energy prices as key risks.

Market participants anticipate that the ECB’s deposit rate—currently at 2.75%—will eventually be reduced to 2%, possibly as early as mid-year. While Lagarde reaffirmed the ECB’s commitment to a data-driven, meeting-by-meeting approach in shaping monetary policy, she acknowledged that consumer spending remains cautious, and business investment is sluggish. Lower interest rates should gradually help by making credit more accessible to both businesses and households, fostering improved economic conditions.

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UK retail spending grew 2.6% year-on-year in January, according to the British Retail Consortium, down from December’s 3.2% but above the 1.2% rise in January 2024. While the increase was partly due to an earlier reporting period, adding extra post-Christmas shopping days, the data reflects renewed consumer appetite for spending in the new year – taking advantage of January discounts on things like bedding and furniture.

However, looking ahead, retailers face mounting cost pressures, including higher employer national insurance contributions, an increased minimum wage, and a new packaging levy. These factors could squeeze profit margins and influence pricing strategies (and thus potentially put upwards pressure on inflation in the coming months). Retail sales are closely monitored by the Bank of England, who this week further added that a rise in wholesale energy prices might see inflation tick up to 3.7% in the third quarter of this year.

Also, it was revealed this week that the UK has no immediate plans to retaliate against the U.S.’ decision to reintroduce tariffs on steel and aluminium, Trade Minister Douglas Alexander stated, stressing the importance of a thoughtful response rather than a hasty reaction.

Set to take effect on March 12^th, the tariffs will impose a 25% levy on steel and aluminium imports into the U.S. Although the UK supplies only about 10% of its steel exports to the U.S., certain specialist manufacturers are more dependent on this market. In contrast, the EU and Canada have indicated they will take countermeasures against the policy announced by President Trump.

Finally, Federal Reserve Chair Jerome Powell told lawmakers Tuesday that the central bank is in no hurry to cut interest rates. His stance aligns with other Fed officials and market participants, who have priced in that rates will likely remain unchanged at the March meeting; “With our policy stance less restrictive and the economy strong, there is no urgency to adjust,” Powell stated.

Still to come this week we have U.S. CPI and PPI, UK GDP, and U.S. retail sales.

Nicola Tune, Portfolio Specialist