Odds of Donald Trump winning a second term as president have risen to about 67%, up from 60% prior to the assassination attempt on the former president over the weekend. The market reaction has been relatively muted so far, but the yield on 30-year Treasuries has surpassed that of two-year notes for the first time since January, driven by expectations that Trump’s policies will spur economic growth. Markets are now grappling with the concept of the “Trump Trade,” which reflects the anticipation of a pro-business environment and significant economic boost through fiscal stimulus. This scenario could limit the extent of Fed rate cuts, helping the dollar maintain its high growth and yield advantage. However, we believe US macroeconomic factors could be a more significant driver of the FX market through the summer. Recent data points to easing inflation, a cooling labour market, and moderating consumer spending, raising concerns about a potential abrupt US slowdown and a more dovish Fed, which may weigh on the dollar.
Recent softer economic data, including broad-based weakness in the June CPI, have increased the likelihood of two Fed rate cuts this year. Additionally, the modest decline in manufacturing conditions reported in the New York Fed’s Empire State Manufacturing Survey suggests the ISM Manufacturing PMI for July could also soften. Today’s focus is on US retail sales, which are expected to show a third consecutive month of weak spending due to high borrowing costs and a cooling labour market.
The British pound has pulled back slightly from its highest level in a year against the US dollar, remaining just below the crucial $1.30 mark. Meanwhile, GBP/EUR is hovering around the €1.19 threshold after reaching an almost two-year high yesterday. The next three days will bring critical macroeconomic data that could significantly influence the pound’s recent positive trend.
Currently, the pound appears unusually attractive compared to other currencies, driven by optimism surrounding the new Labour government, in contrast to political uncertainties in France and the US. UK Prime Minister Keir Starmer plans to use the upcoming King’s Speech to highlight his government’s initiatives to boost economic growth. This improving growth outlook is reducing expectations for interest rate cuts, while other countries lean towards easing. Investors now see a 48% chance of a rate cut in August, down from 60% at the beginning of the month. Key UK data releases that could impact the Bank of England’s monetary policy outlook are on the horizon, starting with inflation on Wednesday, labour market data on Thursday, and retail sales on Friday.
