News of the week summary - 22/06/2025

EU seeks a compromise deal with America

The European Union is edging toward a compromise with Washington on trade, aiming for a limited deal that would resemble the agreement the UK struck with the US. This shift reflects the bloc’s growing reluctance to retaliate against Donald Trump’s tariff threats, fearing both economic damage and internal divisions among member states.

Trump has demanded a 10% “reciprocal tariff” on EU goods, warning that if no deal is reached by July 9, the duty could jump to 50%. The EU had initially held out for broader concessions, but officials now indicate that a UK-style arrangement, one that leaves some tariffs in place while negotiating sector-specific terms later, may be acceptable. Such a deal would cover sensitive industries like steel and cars through reduced-rate quotas, while pushing discussions on semiconductors, pharmaceuticals, and other strategic sectors to a later stage.

This softer stance comes after earlier EU threats to retaliate with tariffs on US products such as bourbon. Trump responded by threatening to impose duties of up to 200% on European wine and whiskey, a move that unsettled countries like Italy and Hungary, which favor continued talks over escalation. France, by contrast, had argued for a firmer response. The divergence underscores how difficult it is for the EU to present a unified front when national industries face different risks.

Beyond tariffs, Washington is pressing Europe to scrap national digital services taxes, reduce restrictions on US media and agricultural products, and ease other so-called “non-tariff barriers.” However, the UK’s experience shows that the EU may be able to resist some of these demands: London kept its digital tax and food standards intact in its own deal, though it did cut tariffs on US beef and ethanol.

To sweeten negotiations, the EU has signaled a willingness to purchase more US liquefied natural gas and weaponry, an offer designed to reduce its sizeable €198bn annual trade surplus with the US. Still, if talks collapse, Brussels would need majority approval from member states before imposing countermeasures, a difficult hurdle given the divisions among them.

For now, both sides appear keen to avoid a trade war, but the looming July 9 deadline means the next few weeks will be crucial in determining whether Europe accepts a pragmatic compromise or risks escalation with Washington.

Fed officials divided over timing of rate cuts

The Federal Reserve is increasingly split on when to begin lowering interest rates, as policymakers weigh the impact of Donald Trump’s tariffs against signs of slowing growth.

Christopher Waller, a Fed governor and potential successor to Jerome Powell as chair, argued that the central bank should start cutting rates as soon as its next meeting. Waller downplayed the inflationary risks of tariffs, noting that despite earlier fears, recent data show limited price pressures. His stance contrasts with more cautious officials who prefer keeping rates steady until the effects of tariffs and broader economic trends become clearer.

The Fed has already lowered rates by one percentage point in 2024, but has since kept them on hold at 4.25–4.5%. This level is considered above the “neutral rate”, which is the rate that would neither stimulates nor restrains economic activity. Cutting rates would make borrowing cheaper, supporting growth, while keeping them higher would guard against inflation. The debate reflects a classic central banking dilemma: balancing the risks of slower growth against the danger of rising prices.

Trump has amplified the pressure, calling for aggressive cuts of up to 2.5 percentage points and attacking Powell directly. While the Fed is meant to be independent, such political rhetoric adds tension around its decisions.

Internal projections highlight the divide: ten Fed officials expect at least two cuts this year, but seven foresee none. Investors, for their part, are betting on two rate cuts starting in October. The disagreement largely centers on whether tariffs will eventually push inflation higher, or whether weak growth and a potentially cooling labor market will force the Fed to act sooner.

Powell emphasized that uncertainty is high and that the Fed’s “obligation is to keep longer-term inflation expectations well anchored.” In practice, this means avoiding both an inflation flare-up and a loss of credibility in its 2% inflation target.

Markets now read Waller’s comments as a sign that the Fed is closer to easing policy than it admits, but officials remain cautious, awaiting clearer evidence from economic data before shifting course.

Key Terms Explained:

• Neutral rate: The interest rate level that neither stimulates the economy (by making borrowing very cheap) nor restrains it (by making borrowing expensive). 

• Anchored inflation expectations: When households, businesses, and investors trust that inflation will remain close to the Fed’s 2% target in the long run. If people lose that trust, inflation can spiral upward (if they expect rising prices and act accordingly) or downward (if they expect deflation).

• Tariff shock: A sudden rise in import taxes, like those Trump has imposed, which can raise the price of foreign goods. If widespread, this can feed into overall inflation, though the recent data suggest the impact has so far been smaller than feared.

Middle East tensions lead European energy prices higher

European energy markets are feeling the shock of the conflict between Iran and Israel, with diesel and jet fuel prices climbing to their highest levels in 15 months. While crude oil prices have only risen modestly, the cost of refined fuels has surged much more sharply, reflecting Europe’s heavy reliance on Middle Eastern supplies.

Since hostilities began, the premium of diesel over crude has jumped by 60%, while jet fuel is up 45%. This widening spread indicates that traders are less worried about global oil availability than about potential disruptions to refined product flows from the Gulf, a critical source of Europe’s energy. More than 20% of Europe’s diesel imports and over half of its jet fuel imports come from the region, with the UK particularly vulnerable (last year, it sourced a third of its diesel and two-thirds of its jet fuel from Gulf countries).

The Strait of Hormuz, through which much of this trade passes, represents a key choke point. Any interruption there would disproportionately impact Europe’s diesel and aviation markets, especially with the peak summer travel season approaching. For now, Israel has avoided striking Iran’s oil export infrastructure, and the broader oil market remains well supplied, which explains why Brent crude has only risen about 9% to just under $77 per barrel. Still, refined product markets have reacted far more dramatically, with jet fuel and diesel trading nearly $27–29 above crude benchmarks.

The effects of these higher costs will not be immediate for consumers and airlines, as many firms use “hedging” strategies, financial contracts that lock in fuel prices in advance, to shield against sudden volatility. However, if prices remain elevated, these protective buffers will eventually expire, passing higher costs on to transport companies and travelers.

In contrast, gasoline margins in Europe have weakened. Demand has been sluggish both at home and abroad, particularly after Nigeria’s new Dangote refinery reduced its dependence on imported gasoline. Exports to Nigeria, once Europe’s second-largest market, have already halved.

The divergence between soaring diesel and jet fuel prices and weakening gasoline demand illustrates how geopolitical risks and shifting global trade flows can reshape energy markets unevenly—exposing Europe to vulnerabilities where it depends most heavily on imports.

    Why do refined fuels move differently from crude oil ?

Altough crude oil is the raw input to produce different fuels, it must be refined into specific products like diesel, jet fuel, or gasoline. Prices for these refined products depend not just on the cost of crude but also on supply and demand in each individual market:

• Diesel and jet fuel are crucial for trucking, industry, and aviation. If supply from a key region (like the Gulf) is threatened, prices can jump sharply even if crude oil remains available elsewhere. Europe is especially exposed because it relies heavily on imports for these fuels.

• Gasoline, on the other hand, has seen weaker demand, both in Europe and in key export markets such as the US, Canada, and Nigeria. With lower demand, prices haven’t followed crude upward, and margins have even shrunk.

So crude oil sets the base cost, but refined fuel markets behave independently, shaped by local supply bottlenecks and sector-specific demand. That’s why in moments of geopolitical stress, diesel and jet fuel prices can surge far more than crude itself.