Sovereign International Daily Market Report
Euro tumbles as Trump trade picks up pace
The US dollar extended its gains on its peers on Tuesday, as market participants continued to come to terms with the reality of a second Donald Trump presidency.
Highlights:
We said in the immediate aftermath of Trump’s election win that the reaction in FX was relatively contained, and that there was room for a fresh move higher in the dollar in the trading sessions that followed. This view so far appears vindicated, with investors pouring into the greenback in the expectation that Trump will double down on his hardline tariff proposals once his second stint in the White House begins in January.
EUR/USD broke yesterday to its lowest levels since November 2023, as markets bet that Trump would target European trade, having threatened to slap tariffs of between 10-20% on imports from the continent during his presidential campaign. Political uncertainty in Germany perhaps further exacerbated the sell-off, as the country’s ruling coalition has said that fresh election would be held in February.
Sterling actually performed even worse than the euro yesterday, dropping following a mixed UK labour report. Q3 UK GDP figures now await on Friday.
USD
Trump’s cabinet is beginning to take shape, and markets have so far reacted to his appointments by sending the dollar even higher across the board. According to reports, Trump is set to appoint Michael Waltz as security adviser and Marco Rubio as secretary of state, two individuals that are viewed as holding a hardline stance towards China. It is difficult to gauge how much of Trump’s tariff proposals are priced into the value of currencies. As we know from his previous term as president, Trump’s policy proposals have a tendency to contain an element of bluster, but these picks could suggest otherwise, and the dollar is rallying as a result.
Focus today turns back to economic data, as investors will have the October US inflation figures to digest. The Fed is expected to deliver another 25bp rate cut at its next meeting in December, but the Trump election win has throw this into some doubt. An upside surprise in today’s CPI report would make a December rate adjustment, which is now only 75% priced in, even less likely.
EUR
The common currency has continued to fall to new lows on the dollar since last week’s US election results, as markets believe that the imposition of US tariffs would create further agony for the bloc’s economy during Trump’s second tenure. The appointment of hardlines within Trump’s cabinet, and an expectation that the new administration will double down on the ‘America First’ approach, is a troublesome development for the Eurozone economy, particularly given its reliance on the US for around 20% of export revenue.
Renewed political uncertainty in Germany is far from helping matters, with the collapse of chancellor Scholz’s government paving the way for fresh elections on 23th February. Talk of parity in the EUR/USD pair have intensified, with a number of the big banks slashing their forecasts for the main exchange rate in the past few days. We will not be explicitly calling for parity in our updated projections, although we do admit that this possibility if undoubtedly back on the table, and far from appears an unrealistic scenario in the current environment.
GBP
The September UK labour report was decidedly mixed. The unemployment rate jumped to an above consensus 4.3% last month (from 4%), its highest level since May. We are, however, continuing to see upside pressures in wage. 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 swaps only pricing in two additional 25bp cuts in the next year.
In the context of the above, the underperformance in sterling yesterday was somewhat surprising, although market participants may merely be placing greater emphasis on the jobless number, rather than wages. Next up for the pound will be speeches from MPC officials Mann and Bailey in the next couple of days, followed by the September GDP report on Friday.
Economic Calendar - 13/11/2024-15/11/2024
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