November 07, 2024

“On top of a Trump election victory and a collapse in German government, this is a huge day for central bank decisions. Policymakers in Sweden, the UK, and the US are all set to cut rates, while the Norges Bank is likely to be the outlier in holding steady.”

Sam Cornford – Head of Trading

USD

The dollar is giving up some of its Trump-led gains this morning after rallying strongly yesterday. The red sweep is not quite completed yet, but there is a very strong chance that the Republicans pick up the House given that they are ahead 206-191. Trump’s victory reverberated across asset markets: the dollar rose against all its major peers, with the euro worst hit; Treasury yields surged, particularly at the long end; and equities rallied on hopes for tax cuts and deregulation. This is a trade that is going to play out over a long time, and it largely depends on just how serious Trump is about blanket tariffs and fiscal loosening – for now, the markets can only trade on their best guess of what he is likely to do.

That means that it is time to switch back to the Fed’s rate path today, where market is pricing in a 93% chance of a smaller 25bps rate cut. Powell is going to have some tough questions to answer in the press conference. He will likely be quizzed on the impact of Trump’s policy agenda on the pace of rate cuts next year – markets have repriced this hawkishly – as well as on the Fed’s independence, with Trump expressing a desire to have more control over the direction of interest rates.

GBP

The key focus for sterling today will be how the Bank of England assesses the impact of a) last week’s budget and b) Trump’s re-election on the path for inflation and UK rates. With a 25bps cut priced at a near certainty, there is little room for shock on the decision itself. But some added caution and an endorsement of the market’s post-budget hawkish repricing could lend sterling some support, while a repeat of the rhetoric expressed by Bailey previously about the potential to become a bit more ‘aggressive’ in cutting rates would see the pound finish the day significantly lower. It is worth noting that GBP/EUR is up nearly 1% this week – the UK and the Bank of England are generally assumed to be less affected by Trump’s policy agenda than the eurozone, and some added political uncertainty in Germany has helped consolidate a move above 1.20.

EUR

After a near-2% post-election drop in the euro yesterday, a collapse in the German government probably could not come at a worse time. Chancellor Scholz has sacked his FDP finance minister after a spat over the German economic model and suspending the debt brake to add some extra stimulus to the Germany economy, leaving him at the head of a minority government . A no confidence vote in January sets the stage for a snap election, but opposition leaders are calling for one as soon as next week. This extra political risk in the eurozone has stunted the euro’s recovery against the dollar this morning. ECB speakers have had little chance to properly respond to Trump’s election win, and Guindos has already tempered expectations in warning that December will be too soon to consider the impact of his tariffs on the eurozone economy.

The Riksbank and the Norges Bank both meet today, but their outlooks could not look any different. At the time of writing, while the Riksbank has delivered a 50bp rate cut to give the economy some much needed support, Norwegian central bankers are not likely to begin cutting until at least March next year.

Markets

The US equity markets endorsed Trump wholeheartedly yesterday. The S&P 500 surged 2.5% and the Nasdaq by 2.7% as stock traders anticipate lower taxes and deregulation will lift corporate profits, at least in the short run. Small caps did extremely well, with the Russell 2000 up nearly 6% to a three-year high. European stocks fared poorly, meanwhile. The FTSE 100 stayed flat, but the Euro Stoxx 50 slumped by 1.4%, hurt by those likely to suffer under a Trump tariff regime.

Main Economic Events (All Times CET)

8:00am: Swedish CPIF Inflation
9:30am: Riksbank Rate Decision
10:00am: Norges Bank Rate Decision
1:00pm: Bank of England Rate Decision
2:30pm: US Jobless Claims
8:00pm: Federal Reserve Rate Decision

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