Trump's Triple Victory
Early optimism that US President-elect Donald Trump might adopt a pragmatic approach in office now appears to be fading, giving way to a more aggressive interpretation of his policies. Proposals for tariffs and appointments to key positions are unsettling investors. European equity futures are showing a downturn, following Asia’s overnight losses, while the US dollar continues its rally—breaking past 155 against the yen and potentially prompting Japanese intervention to stem its currency’s decline.
As the results of the US election continue to ripple through global markets, Republicans are projected to maintain control of the House of Representatives, handing the party comprehensive control in Washington and delivering Trump a “triple victory.” This development has intensified concerns in financial markets that Trump’s policies could drive inflation, which may force the Federal Reserve to delay or moderate its rate-cutting cycle. Currently, traders are anticipating roughly two Fed rate cuts by June, down from nearly four expected at the start of last week, further boosting the dollar as US bond yields hit multi-month highs. Beyond the election, the US economy’s strength, reflected in a record-high optimism index from October’s NFIB small business survey, supports this strong dollar trend.
Today’s US inflation data release will be the next potential trigger for volatility. Core inflation is projected to have remained steady at 3.3% in October for the second consecutive month, after reaching a low of 3.2% in July. The Fed will be closely watching this first hint of a potential reversal in the broader trend of disinflation observed over the past year or so.
Continued European Underperformance
European markets remain under pressure as political uncertainties, both local and international, and renewed concerns over economic growth weigh on assets. Investor confidence in Germany saw a steeper-than-expected fall in November, as uncertainty grows regarding potential coalition challenges and Trump’s White House victory.
Prior to the US election, roughly 44% of German industrial companies believed Trump’s win would harm their business, yet only about 4% had taken proactive measures to mitigate these risks, according to the Ifo Institute. Political concerns are compounding the issue of weak demand, with approximately half of German companies reporting insufficient orders. Adding to this bleak outlook, yesterday’s ZEW survey showed the sub-index for the current economic situation falling to its lowest point since the early days of the pandemic in 2020, now at -91.4, marking its fifth-lowest reading since 2005.
The EUR/USD continued its decline for a third consecutive day, holding just above the $1.06 level, inching closer to its yearly low as European stocks underperform relative to their US counterparts. The Stoxx 600’s year-to-date gain slipped below 5% for only the second time since April, while the S&P 500 remains roughly 25% above its starting level for the year. This continued European underperformance weighs on sentiment as investors contemplate whether US equity markets may outshine others globally for yet another five-year stretch.
Pressure on the Pound
The British pound is struggling, consolidating near multi-month lows against the US dollar after breaking below key support levels, including long-term moving averages. Fresh demand for the dollar this week, fuelled by Trump’s appointment of hard-line trade advisers signalling support for substantial import tariffs, has added to the downward pressure on the pound. The pro-cyclical pound is also seeing broad selling as questions linger about the Bank of England’s (BoE) pace in easing policy.
Despite recent data showing stronger-than-expected wage growth in the UK, an unexpected rise in unemployment is weighing on sterling. With the job market showing signs of cooling, the BoE could consider bringing rates closer to neutral. Yet, the risk of inflation rebounding, further complicated by Trump’s anticipated policies, adds complexity to the BoE’s decision-making. The BoE has indicated a gradual approach to rate reductions, with overnight index swaps currently pricing in around 63 basis points in cuts by December 2025, compared to the Fed’s expected 70 basis points. This divergence could prove to be a misalignment, given both economies’ potential for higher inflation under Trump. In the short term, however, the UK-US 2-year real yield spread could offer some support for sterling, which appears to be approaching oversold levels on the daily chart.
Elsewhere, the pound is hovering near the €1.20 mark against the euro. The UK may face fewer direct tariff risks than the Eurozone, owing to its trade deficit with the US in goods. Moreover, the UK’s stronger cyclical fundamentals and supportive fiscal-monetary policy mix could boost sterling against the euro, potentially creating a favourable outlook for GBP/EUR heading into 2025.
