Piling into Trump Trades
The extension of so-called “Trump trades” reflects investors’ confidence that President-elect Donald Trump will take swift action this time around, implementing his policies more rapidly than in his previous term. The US dollar continues to surge, reaching new multi-month highs against a range of currencies, while equities soar and cryptocurrency experiences a record-breaking rally in response.
Trump’s policies—aimed at a trade dynamic that favours the US and a more aggressive fiscal stimulus—are expected to further strengthen the near-term economic performance of the US relative to its G10 peers. Economic momentum has swung back in favour of the US, prompting a hawkish re-evaluation of the Federal Reserve’s interest rate cycle, which is decidedly dollar-positive through both tariff and fiscal-monetary policy channels. Despite the anticipation of increased protectionism, investor appetite for risk remains strong. Equities continue to rally to all-time highs, and notably, the cryptocurrency market is booming, with several digital assets surging by over 100% this month.
Bitcoin’s record-breaking rally saw it surpass $89,000, pushing the total crypto market value above its peak during the pandemic. Some analysts are predicting Bitcoin could reach $100,000 by year-end.
A Long List of Tail Risks
Global equity benchmarks are on the rise, and volatility indices are falling, yet the euro continues to struggle to attract buyers. Republicans in the United States are close to achieving a “trifecta” by winning control of the White House and both chambers of Congress, which—coupled with expectations of rate cuts and deregulation—has led to US equities outperforming their global counterparts. Meanwhile, increased tariffs under Trump are encouraging investors to favour the US dollar over trade-sensitive currencies like the euro.
Domestically, expectations of a further 25-basis-point rate cut from the European Central Bank in December and political instability in Germany are adding additional pressure on European assets. EUR/USD is doubly affected by the simultaneous expectation of European underperformance and US outperformance. The currency pair is on track for its second consecutive monthly decline, dropping below the $1.07 mark and hovering at 4.5-month lows as traders assess the potential for further downside.
While not an immediate threat, rising energy prices are emerging as a potential risk heading into winter. Gas prices have surged to €44 per megawatt-hour, marking a record for the year, as colder weather and decreasing storage capacity drive demand for protection against further energy price increases. This is something to monitor closely over the coming weeks. For the week ahead, the ZEW sentiment index is the only notable release in Europe, but upcoming speeches from Federal Reserve officials and Wednesday’s US CPI report will likely play a larger role in shaping the euro’s direction.
Pound Tumbles after Mixed Jobs Report
GBP/USD has fallen to a 13-week low, breaking through support levels at both its 200-day and 200-week moving averages, reaching the lower end of $1.28. Although UK wage data came in slightly stronger than anticipated, the unemployment rate rose to 4.3% for July to September 2024, up from 4% in the prior three-month period and exceeding the forecast of 4.1%.
Initially, the market appeared to balance these two metrics. However, sterling has since faced broad-based selling pressure, opening lower against all its G10 peers in Europe. Despite the typical positive influence of swap differentials and a risk-on rally for the pound, sterling appears more responsive to developments in the US. Going forward, nominal yields are expected to be a key factor, with risks skewed in favour of the US dollar.
It is worth noting, however, that the UK is likely less vulnerable to direct tariff risks than the Eurozone, given its trade deficit in goods with the US. This arguably provides a positive tailwind for the pound against the euro. GBP/EUR remains above the €1.20 level this morning, after pulling back from over two-year highs reached yesterday.
