The USD has received a fresh bout of demand as a second Trump presidency continues to sink in with the market.
The expectations are that Trump will double down on his hardline tariff proposals and suggested expansionary policies. This may lead to higher inflation and therefore prevent the Federal Reserve from cutting rates more aggressively, which has made the dollar more attractive. Recent comments from Fed officials seem to support this notion and there is now more uncertainty over whether they will follow through with another 0.25% rate cut next month. This afternoon’s US inflation data (CPI – 1.30pm) will therefore be closely watched, as any surprise on the upside could dramatically change the odds on a December cut and consequently lead to further Dollar strength.
The Euro has continued to be on the backfoot since the US election news. Markets are concerned that Trump could target European trade following the threats he made during his campaign (e.g. tariffs of between 10-20% on any imports). Furthermore, news that the governing coalition in Germany has collapsed (with fresh elections in Feb) has added to the Euro’s woes. Talk of parity in the EUR/USD pair has now intensified, with a number of the big banks slashing their forecasts for the main exchange rate in the past few days.
In other news, Sterling performed poorly yesterday following a mixed UK jobs report. The UK unemployment rate jumped to above consensus to 4.3% last month (from 4%), its highest level since May. However, the data showed continued upside pressures in wages. Average earnings growth including bonuses accelerated again, rising to an annual pace of 4.3%, up from 3.9%. The latter should provide the Bank of England with little incentive to adopt anything more than a gradual easing cycle in the coming months, with the market only pricing in two additional 0.25% cuts in the next year.
As a result, the GBP/USD is trading around a 3mth low having lost nearly 2-cents this week. The EUR/USD is down around 3-cents since the US election and had touched the lowest levels since Nov 2023. The GBP/EUR has come off its most recent highs having fallen around 1-cent from Monday and trading around a 1-week low. Next up we the US inflation data out at 1.30pm today and UK growth data (GDP) on Friday morning.
