Europe’s central bankers fear more turbulence in testy US relations - Free Malaysia Today

European central bankers are increasingly wary that deteriorating diplomatic relations with the United States could inject fresh volatility into the global financial system. While the specific triggers remain unspecified, the underlying concern is clear: a breakdown in transatlantic cooperation—whether over trade, sanctions, or regulatory matters—can create sudden shifts in market sentiment, currency movements, and cross-border investment flows.

For central banks, this uncertainty is particularly challenging. They must set monetary policy based on forecasts of growth and inflation, both of which become harder to project when geopolitical tensions disrupt supply chains or alter demand patterns. A strained relationship with the US also complicates coordination on financial stability, and any sharp moves in the euro-dollar exchange rate could influence import prices and competitiveness.

What to watch next: signals from US and European officials on trade negotiations, any new tariffs or sanctions, and how bond markets react to political headlines. Central bankers will likely emphasise data-dependence, but their comments on external risks will be closely parsed for clues about how much weight they place on transatlantic turbulence relative to domestic fundamentals.