November 08, 2024

“The choppy trading continues into the tail end of the week, with a significant proportion of the post-election dollar rally now unwound and the likes of NOK and AUD rising aggressively. Central bank decisions from the Federal Reserve and the Bank of England showed that policymakers are looking for more certainty around Trump’s policies before they begin integrating them into their decision-making.”

Tim Hallinan – Trading Director

USD

Whether it is a case of cashing in on Trump bets, or the markets concluding that tariffs are unlikely to be implemented as suggested, the dollar has been unable to make its post-election gains stick. In fact, many in the risk-sensitive and emerging market FX baskets – NOK, AUD, NZD, and most surprisingly MXN, for example – are now higher than they were before election night. Tariff fears do appear to be fading somewhat, and instead the two prongs of Trump policy that are virtually guaranteed – tax cuts and deregulation – are lifting expectations for global growth and corporate earnings, which is having a positive effect on risk appetite.

Some of this is also down to the reluctance of central bankers to steer away from their near-term rate paths based on the new administration. After cutting by 25bps yesterday, Chair Powell emphasised that the short-term direction for rates remains downwards and that speculation about Trump policies would not guide decision-making until there is a clearer economic impact. Policymakers remain confident in the disinflationary path and at this stage another rate cut in December seems increasingly likely, unless the data tells us otherwise before December.

GBP

Sterling continued its grind higher against the euro and the dollar yesterday as the Bank of England delivered a second 25bp rate cut but upped its estimates for headline inflation to rise by 0.5% extra into 2025. The effects of last week’s budget on the economic outlook were the main point of discussion in the press conference, with the Bank concluding that the increased spending and net fiscal loosening next year would boost GDP and inflation before the impact fades away soon after. However, the forward guidance remained unchanged. The BoE is sticking to its ‘gradual’ approach, which the market continues to read as one cut per quarter, and the promise is to observe the impacts of the budget over time and adjust accordingly. For now, traders are looking for a skip in December and another cut in the new year.

EUR

The euro continues to underperform its major peers, burdened by a potential heavy trade impact from Trump’s policies and a political crisis in Germany. It has lagged a wider recovery against the dollar as markets have reset their positions in the days after the US election, and GBP/EUR is up a healthy 1% so far this week. Talks between Olaf Scholz and the opposition leader ended inconclusively, and for now the stage is still set for a German election sometime in March.

Elsewhere in Europe, the central banks of Sweden and Norway largely met expectations at their meetings yesterday. The Riksbank cut by 50bps as policymakers try to avoid a further weakening in the economy that pulls inflation too far downwards, while the Norges Bank held steady once again and pointing to NOK’s depreciation as a continued concern. NOK/SEK has shown some strong momentum this month as this divergence has grown ever stronger.

Markets

A Wall Street stock rally is the Trump trade that is sticking the most this week, with the major indexes hitting fresh record highs in yesterday’s session. Tax cuts and deregulation are some of the more certain policies to be expected from the new administration, and they bode well for corporate profits in the near term.

Main Economic Events (All Times CET)

1:15pm: BoE’s Pill speaks
2:30pm: Canadian Employment Change
4:00pm: US UoM Consumer Sentiment

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