EURUSD gains after ECB minutes were released amid historic market turmoil following Trump's April 2nd tariff bombshell. The April 16-17 meeting reveals a central bank responding to unprecedented global disruption while eurozone disinflation accelerates beyond expectations.
Disinflation Accelerating
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Headline inflation: 2.2% (vs 2.3% prior), energy turning negative at -1.0%
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Core inflation: Sharp drop to 2.4% from 2.6%, services cooling to 3.5%
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Wages moderating faster: Corporate surveys show 2025 expectations down to 3.0%
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Market pricing sub-2% inflation through 2025, falling to 1.2% by early 2026
Germany's Fiscal Game-Changer
Debt brake reform unleashing massive defense and infrastructure spending over next decade - ECB sees this offsetting trade war damage and supporting medium-term growth.
Policy Decision: Insurance Cut
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Unanimous 25bp reduction to 2.50% deposit rate
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Dropped "restrictive" language - no longer saying policy becoming "meaningfully less restrictive"
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Some wanted 50bp given increased recession risk and financial tightening
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Meeting-by-meeting approach maintained amid "exceptional uncertainty"
Competing Forces
Near-term disinflationary:
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Trade uncertainty crushing confidence
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Euro strength and commodity collapse
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Tighter financial conditions despite rate cuts
Medium-term inflationary risks:
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German fiscal stimulus kicking in
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Potential EU retaliation on hard-to-substitute goods
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Supply chain fragmentation raising structural costs
Bottom Line
ECB delivered insurance against trade war fallout while disinflation runs ahead of forecasts. Euro strength and collapsing commodities create near-term deflation risk, justifying cuts despite concerns about medium-term inflation from fiscal expansion. Markets expect terminal rate around 1.7% by May 2026, then rate hikes resuming as structural changes reshape the economy.
The ECB sees potential emergence of a "new global equilibrium" - either temporary disruption or permanent fragmentation with higher structural inflation.
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