In his current presidency, President Trump's aggressive tariff strategy has significantly impacted financial markets, introducing heightened volatility and uncertainty. The new administration has already introduced unprecedented tariffs within its first two months. Figure 1 provides an overview of currently imposed and threatened tariffs. These tariffs imposed by the US on other countries has also led to significant retaliations from those countries, which exacerbates the issue even further. The fact that the Trump administration also threatens tariffs nearly on a daily basis further bolsters global uncertainty. These tariffs have also disrupted established trade relationships and supply chains, leading to increased costs for businesses and consumers alike. Investors are now grappling with the potential for slower economic growth, as higher import costs contribute to rising inflationary pressures. Market participants also showed some optimism on a Trump administration for the anticipated resolutions of ongoing wars, especially in Israel and the Ukraine. While most successful in Israel, the situation between Russia and Ukraine remains highly unstable. These developments have undermined investor confidence, compelling market participants to reassess risk exposures and seek refuge in more stable assets. Consequently, the financial markets are navigating a complex landscape, where protectionist policies challenge the principles of free trade that have long underpinned global economic growth.

​Over the past weeks, a key election for Europe took place in Germany. Elections turned out as expected with strong gains of the CDU and AfD and heavy losses of the previous ruling coalition. It also showed a significant shift to the right. It is highly likely that the CDU will form a coalition with the SPD to achieve a majority. With a stalling economy, the removal of their “debt brake”, which limits the country to borrow at maximum 0.35% of their GDP, is high on the agenda. In conjunction with Trump’s administration, European countries will likely increase their defence spending over the coming years, as Europe is contributing significantly less to NATO than the US. The new administration in the US is also not slowing down after its highly active start on 20th January 2025. In particular, the proposed and increasingly severe tariffs have caused markets to plunge in the past weeks. Not only are companies hurt directly by countermeasures of other countries, but it also causes significant headache on a return of increasing inflation with already high interest rates.

​Since stepping into office in January 2025, President Donald Trump has been highly active in reshaping US domestic and foreign policies, implementing a range of executive orders with a focus on national security, the revitalisation of the economy, and immigration. While he announced potential tariffs, the pace at which he planned to impose these tariffs is surprising. In February 2025, he announced a 25% tariff on all imports from Canada and Mexico, citing border security and drug trafficking concerns, with Canadian energy exports facing a lower 10% tariff. However, these tariffs are currently suspended for 30 days, and it will be vital to observe whether they will be predominantly used as a tool for negotiations or are intended to be fully implemented. For Canada and Mexico, it could have devastating effects on their currency, as the Chinese Yuan declined significantly. Importantly, China is much less reliant on the US for exports than Canada or Mexico are. Trump also imposed a 10% tariff on all Chinese imports. In retaliation, China announced tariffs on US energy and specific machinery, such as agricultural machinery and large-engine vehicles. Lastly, Trump reinstated prior tariffs of 25% on steel and aluminum imports, bolstering the country’s own industry. Unlike during his first tenure, he also imposed these tariffs on allied nations.

​After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels.
To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025.