How will ECB rate cuts and trade tensions shape European markets this week?

How will ECB rate cuts and trade tensions shape European markets this week?

European equity markets face headwinds from escalating trade tensions and geopolitical risks, while investors await the ECB's expected rate cut and inflation data. The FTSE 100  and Germany 40 (DAX 40) approach key technical levels amid mixed market signals.

European stocks start week under pressure

European equity markets began a new week and month under a cloud of negative news headlines from over the weekend. This follows a strong May, with the Germany 40 climbing 6.67% and the FTSE 100 gaining a solid 3.27%.

Among the headlines casting a shadow over European equity markets, China accused the United States (US) of violating their recent trade agreement, following President Trump's claims last week that China had done the same. Furthermore, President Trump announced after the market closed on Friday that tariffs on steel and aluminium imports would double from 25% to 50% by 4 June.

Additionally, a report from the International Atomic Energy Agency (IAEA) indicated that Iran had increased its stockpile of uranium enriched to nearly weapons-grade levels by nearly 50% over the past three months, which helped send crude oil prices surging 4% higher in the European time zone in anticipation of a possible response from Israel.

Defence stocks boost FTSE

While the Germany 40 slipped, the FTSE edged higher, buoyed by defence stocks that outperformed following the government's announcement of a £15 billion plan to expand its attack submarine fleet and invest in its nuclear deterrent under the AUKUS alliance with the US and Australia.

On the trade/tariff front, while President Donald Trump's European Union (EU) tariff delay announced early last week has eased immediate concerns, the EU remains firm on negotiating a balanced deal and prepared to announce countermeasures if negotiations which continue this week end in disagreement.

Key data and ECB meeting in focus

Looking ahead, the focus of this week's data calendar will be on tonight's eurozone inflation report followed by Thursday night's European Central Bank (ECB) interest rate meeting previewed below. For tonight's inflation report, the market is looking for the headline measure of inflation to ease to 2.0% year-on-year (YoY) in May from 2.2% YoY prior. The core measure is expected to ease to 2.5% YoY from 2.7% prior.

ECB interest rate meeting

Date: Thursday, 5 June at 10.15pm AEST

At its last meeting in April, the ECB cut policy rates by 25 basis points (bp), taking the deposit rate to 2.25% as widely expected. ECB President Lagarde sounded dovish at the press conference, highlighting that the downside risks to growth had increased due to tariffs and uncertainty around the reciprocal tariffs in terms of magnitude and timing, which would lead to a dampening of exports, investments and consumption.

This Thursday, the ECB is expected to cut its policy rate by another 25 bp, taking its deposit rate to 2.00%. Updated staff forecasts will likely show downward revisions to growth and inflation, consistent with the ECB cutting rates to 1.75% later this year. The rates market is fully priced for a 25 bp rate cut this week and for another 25 bp rate in October.

ECB deposit rate chart

FTSE 100 technical analysis

From its record high of 8908, the FTSE fell 1364 points to a low of 7544 in early April, before its impressive rebound, which at last week's high took it to within 84 points or approximately 0.9% below its record 8908 high of March this year.

While we would be surprised if the FTSE didn't retest its record high after coming this close and spending the past four sessions consolidating, we aren't interested in chasing it at these levels given the overbought nature of the rally. Instead, we would view a pullback towards the 200-day moving average at 8400 as a potential buying opportunity.

FTSE 100 daily chart

Germany 40 technical analysis

After hitting a fresh record high last week of 24,325 and then easing into the weekend, there is now a "loss of momentum" type weekly candle in place against the backdrop of bearish weekly relative strength index (RSI) divergence.

While we are reluctant to read too much into this development ahead of this week's ECB interest rate meeting, we do suspect that at the very least it sets the scene for some corrective price action in the weeks ahead, involving a pullback towards the 23,475 double high of March this year.

Germany 40 daily chart

• Source: TradingView. The figures stated are as of 3 June 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.