January 20, 2025

“The market is braced for Trump’s inauguration this afternoon and his long list of executive orders. The dollar index has strengthened 9% since Trump’s poll performance began to pick up in the autumn, and its momentum is set to be tested by some concrete policy measures.”

Sam Cornford – Head of Trading

USD

It is inauguration day in the US, and the market will be focused on the blitz of around 100 executive orders that Trump has planned to kick off his second term as president. There are several topics on the agenda, including a national energy emergency to boost fossil fuel production and the initial deportation operations that are slated to begin as soon as this week. For FX, however, the bulk of the market impact is likely to come from what he says or does about trade policy. The most dollar-positive outcome would be a shock-and-awe approach with an immediate enactment of the 10-20% blanket tariffs that he promised during his campaign. Although possible, recent reports have suggested that an incremental implementation to slowly increase his leverage is much more likely. Remember that the key targets are those who have large trade surpluses with the US – think China, the EU, Canada, and Mexico. It is not out of the question that this week turns into a ‘buy the rumour, sell the fact’ type of trade, and that softer-than-expected tariff threats prompt at least a short-term drop in the greenback. Today is Martin Luther King Day, so liquidity in the US will be thin and could amplify volatility during Trump’s first acts. It is also the beginning of the WEF Forum in Davos, where a wave of key financial figures is set to speak.

GBP

The pound has begun the week slightly firmer ahead of Trump’s inauguration and tomorrow’s labour market data. A consensus for a sharp increase in wage growth in November for both the headline (5.6%) and ex-bonus (5.5%) measures is unlikely to ease the pressure on sterling. It is still suffering from a weakened growth outlook, a drop in sentiment, and rising concerns about what will be required to meet the government’s fiscal rules as rising gilt yields squeeze the Treasury’s headroom – the result is a somewhat more complicated relationship between yields and the pound.

EUR

Being one of Trump’s primary tariff targets, the eurozone will be particularly sensitive to the trade policy path that he lays out in the coming months. ECB President Lagarde has called for the EU to turn straight to negotiation to appease Trump and to soften the blow, but undoubtedly the European Commission is also planning retaliatory measures that could spark a trade war. The consensus appears to be that the global trade fragmentation would be net disinflationary for the eurozone, as demand takes a hit and cheap US-bound Chinese goods land in Europe instead, although disrupted supply chains and an increase in US goods prices could lead to higher price pressures in some areas. Big tariffs could have a double effect on EUR/USD, therefore, as a) the initial tariffs mechanically weaken the euro, and b) the ECB is forced to cut more aggressively than it otherwise would to boost the eurozone economy.

Markets

Global stocks rebounded strongly last week as softer inflation data improved the prospects of further rate cuts from the Fed this year. The S&P 500 rose just under 3%, the UK’s FTSE 100 grew 3.1%, and the Eurostoxx 50 gained 3.4%.

Main Economic Events (All Times CET)

4:30pm: BoC Business Outlook Survey
6:00pm: US Presidential Inauguration Ceremony

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