Dollar soars after Trump sweep

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12 November 2024

scris de
Roman Ziruk

Senior Market Analyst

Market uncertainty over the US election was resolved in the most clear cut way imaginable, as the Republicans swept not only the presidential contest but also the House and the Senate.

W
hile this resolution will bring about further uncertainty over the policies that will be pursued by the second Trump administration, the tail risk feared by markets (a contested election) is not going to be an issue. Risk assets seemed to celebrate the latter with soaring gains in most stock indexes, with the conspicuous exception of European ones. Interest rates rose across the curve on fears of Trump’s inflationary instincts. The dollar rose sharply, but not as much as would have been expected, in a sign that markets had priced in a Trump advantage going into the election. As an aside, the results of the elections were a serious vindication of the accuracy of prediction markets relative to polls.

With the US election out of the way, macroeconomics and policy news again matters. However, its impact will be occasionally swamped by headlines about the incoming administration’s policies, particularly as regards to tariffs, as it is not clear how much of Trump’s campaign bluster will result in actual policy. Nevertheless, next week’s inflation data out in the US (Wednesday) is key. Before that, the UK labour report will be closely watched, given the additional uncertainty over the pace of Bank of England cuts introduced by the loose Labour budget.

Figure 1: G10 FX Performance Tracker [vs. USD] (1 week)

Source: LSEG Datastream Date: 11/11/2024

 

USD

We have spent so much time and effort analysing and predicting the US election that a return to normality will be welcome. We hope this started last Thursday with a mostly anodyne Federal Reserve meeting and press conference. Rates were lowered by 25 basis points, as expected, and Chair Powell offered little forward guidance, which is reasonable given the uncertainty over the incoming Trump administration policies.

The result of the election should mean a general upward repricing of policy rates, and this week’s inflation report takes on added importance. An upward surprise even before Trump’s inflationary policies start to be felt would not be welcome by bond markets, and would further support the narrative that Federal Reserve cuts in 2025 will likely be very gradual. In case you missed it, you can read our thoughts on the outcome of last week’s election, and its impact on the foreign exchange market, in our full US presidential election reaction report.

Figure 2: US Electoral College Map (2023 – 2024)

Source: 270towin Date: 11/11/2024

 

EUR

The euro suffered the most of almost every major currency on the news of Trump’s victory. The prospect of tariffs on the European Union’s biggest export markets comes at a delicate time for the Eurozone economy. While third-quarter GDP growth numbers came out better than expected, leading indicators such as the PMI surveys are suggesting that stagnation may be on the way for the fourth quarter.

Widening interest rate differentials also add to the pressure on the common currency, although at current levels there is a lot of bad news priced in the euro. EUR/USD has broken to fresh lows below the 1.07 level this morning, and we think that fresh downside could be on the way as markets continue to reevaluation their expectations under Trump 2.0.

 

GBP

The euro suffered the most of almost every major currency on the news of Trump’s victory. The prospect of tariffs on the European Union’s biggest export markets comes at a delicate time for the Eurozone economy. While third-quarter GDP growth numbers came out better than expected, leading indicators such as the PMI surveys are suggesting that stagnation may be on the way for the fourth quarter.

Widening interest rate differentials also add to the pressure on the common currency, although at current levels there is a lot of bad news priced in the euro. EUR/USD has broken to fresh lows below the 1.07 level this morning, and we think that fresh downside could be on the way as markets continue to reevaluation their expectations under Trump 2.0.

Figure 3: Bank of England Base Rate (2014 – 2024)

Source: LSEG Datastream Date: 11/11/2024

 

RON

The leu placed at the very bottom of the CEE dashboard, almost unchanged against the euro – as is usually the case – while the NBR kept rates stable for the second consecutive meeting with a reference rate at 6.5%. As the budget deficit will likely exceed 7% of GDP this year, which needs to be addressed urgently, fiscal and incomes policy stances have been underlined as key sources of uncertainty. At the same time, inflation (currently at 4.6%) is expected to climb by the end of the year, fuelled by rapidly rising domestic demand (real retail sales soared by 10.7% YoY last week, most in 3 years) supported by sky-high wage growth.

Figure 4: Romania Real Retail Sales [YoY] (2022 – 2024)

Source: Bloomberg Date: 08/11/2024

Looking at the current macroeconomic environment, we expect no rate cuts coming soon, with the pause likely extended throughout a large part of 2025. The growth outlook still looks relatively healthy – particularly compared to most other European countries – which should be validated by this week’s Q3 GDP reading out on Wednesday. Tuesday, meanwhile, will give us some hints on price pressures with October inflation print out that day. We do agree with the NBR outlook on this one and expect close to no change in the measure.

 

PLN

Although we viewed the initial impact of Trump’s election win on the zloty as surprisingly muted, the volatility has remained elevated, and the PLN started this week with a sell-off – the Trump trade may be here to stay for some time.

In addition to external news, investors were keeping track of Poland’s monetary policy developments last week. Rates were left unchanged, as broadly expected, with attention instead on the updated forecast. It is somewhat more pessimistic, but with regard to inflation, a lot will depend on regulatory decisions. As for the return to rate cuts, everyone is waiting for March, when new projections will be unveiled. It is not, of course, set in stone, but a reduction in March seems quite likely. In the coming days attention should be divided between external news and local data, particularly the Q3 GDP data out Thursday.

 

HUF

Despite hard macro readings out of the country proving to be rather unimpressive and the Republican sweep coming to fruition, the Hungarian forint managed to strengthen against the euro last week. A risk-on recovery rally on Thursday was not disturbed by further poor readings out of Hungary’s industrial sector and rather unimpressive retail sales data. At the start of this week, the forint is, however, on the back foot again as investors continue to digest the election news.

Recent moves proved that markets remain highly volatile, and uncertainty is undoubtedly high. In the near future a lot should depend on signals coming from Trump’s camp, which are particularly important for the high-beta forint and zloty. Outside news is likely to remain key, especially in the near term, and Tuesday’s inflation reading, which is set to point to a stronger price growth, is likely to be overshadowed.

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