Dollar surges to multi-month highs after Trump’s victory

Important calendar events

• JPY: Average Cash Earnings, Preliminary Machine Tool Orders 
• GBP: RICS House Price Balance, Halifax HPI, BOE Monetary Policy Report, Monetary Policy Summary, MPC Official Bank Rate Votes, Official Bank Rate
• EUR: German Industrial Production, German Trade Balance, Retail Sales
• USD: Unemployment Claims, Preliminary Nonfarm Productivity, Preliminary Unit Labor Costs, Final Wholesale Inventories, Mortgage Delinquencies, Federal Funds Rate, FOMC Statement, FOMC Press Conference, Consumer Credit 

USD

The dollar surged after the announcement of Donald Trump’s victory in the US Presidential elections. The dollar index skyrocketed from 103.5 to a four-month high of 105.4. US treasury yields also strengthened, with the US 10-year bond yield rising from 4.29 to 4.43%.

The dollar has been under pressure this week due to the uncertainty surrounding the US Presidential elections. On Wednesday, after the announcement of Donald Trump’s victory in the elections, the dollar surged to a four-month high. Trump’s proposed tariffs and tax policies will support economic growth, boosting the dollar. In addition, the import tariffs imposed are expected to drive inflation higher, which may force the Fed to keep interest rates at restrictive levels for longer.  

The US Federal Reserve will announce its interest rate decision on November 7th. The Fed is expected to lower interest rates by 25 basis points this week. Market participants will focus on Fed Chair Jerome Powell’s press conference after the meeting for hints on the Fed’s rate outlook.

The Federal Reserve cut its benchmark interest rate by 50 basis points to a target range of 4.75% to 5.00% in September, after holding interest rates steady since last July. The Fed launched its easing cycle with an aggressive rate cut, signaling the end of its restrictive monetary policy. Fed Chair Jerome Powell stated that the central bank aims to strengthen the US economy and labor market. 

The US economy expanded by only 2.8% in the third quarter of 2024, after rising by 3.0% in the second quarter of the year and by 1.4% in the first quarter of the year, while markets were anticipating 3.0% growth in the third quarter of 2024. The US economy is suffering from prolonged tightening, raising recession concerns.

US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2.0% target. Headline inflation cooled slightly to 2.4% in September from 2.5% in August against expectations of a drop to 2.3%. Monthly CPI rose by 0.3% in September, surpassing expectations of 0.2% growth. Annual core CPI, which excludes food and energy, rose to 3.3% in September from 3.2% in August. Monthly core CPI rose by 0.3% exceeding expectations of 0.2% growth.

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EUR 

EUR/USD plummeted from 1.093 to 1.068 on Wednesday after Donald Trump’s victory buoyed the dollar to a four-month high. If the EUR/USD pair declines, it may find support at 1.066, while resistance may be encountered near 1.095.

Final Services PMI data for the Euro Area released on Wednesday were optimistic but failed to provide support for the Euro. Final Services PMI for the Eurozone rose to 51.6 in October from 51.2 in September against 51.2 anticipated. The EU Services sector continues to expand at a more rapid pace, as evidenced by a rising print above the threshold of 50.0.

Final Manufacturing PMI data released on Monday for some of the EU’s leading economies and for the Eurozone as a whole, were in line with expectations. EU Final Manufacturing PMI rose marginally to 46.0 in October from 45.9 in September against expectations of 45.9 print. The manufacturing sector remains in contractionary territory, as evidenced by a print below the level of 50.0 which denotes industry expansion. 

The ECB lowered its benchmark interest rate by 25 basis points in October, bringing its main refinancing rate to 3.40%. The ECB started its easing cycle in June, lowering interest rates by 25bps for the third time this year in October. 

ECB President Christine Lagarde has stated that the decision to cut interest rates was unanimous, but did not commit to future rate cuts. Lagarde stressed that economic activity in the Eurozone is slowing down inducing the ECB to lower interest rates. She also stated that policymakers are confident that inflation will drop to the central bank’s 2% target in 2025 but stressed that there are both upside and downside risks to inflation. 

Inflationary pressures in the Eurozone are not cooling as fast as expected. Eurozone inflation rose to 2.0% year-on-year in October from 1.7% in September, against expectations of 1.9%. Core CPI, which excludes food and energy, also came in higher than anticipated, remaining steady at 2.7% in October, against expectations of a 2.6% print. 

Preliminary Flash GDP data for the third quarter of the year showed that the Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2 against initial estimates of 0.2% growth. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.

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GBP 

GBP/USD dipped from 1.304 to 1.284 after the announcement of Trump's victory in the US elections on Wednesday. If the GBP/USD rate goes up, it may encounter resistance near 1.307, while support may be found near 1.279.  

The BOE voted to maintain its restrictive monetary policy in September, keeping its official rate at 5.25% to 5.00% after cutting interest rates in July. BOE policymakers voted to keep interest rates steady with a majority of 8-1. Bank of England Governor Andrew Bailey has stated that he is optimistic that inflationary pressures in the UK will ease sufficiently to allow for the BOE to cut interest rates further. 

Market participants will focus on the BOE policy meeting this week. BOE policymakers will announce their interest rate decision on the 7th, the same day as the Fed’s interest rate announcement. Analysts predict that the BOE will lower interest rates by 25bps this week, the same as the Fed. Markets will focus mostly on the BOE’s forward guidance and Andrew Bailey’s press conference after the policy meeting. 

Britain’s new Labour Government announced its first budget last week, causing volatility in the price of the Sterling. UK Chancellor of the Exchequer Rachel Reeves revealed a 40 billion pound tax rise, which will be spent largely on the health and energy sectors. 

Headline inflation in the UK dropped to 1.7% year-on-year in September from 2.2% in August against expectations of a print of 1.9%. Core annual inflation, which excludes food and energy, dropped to 3.2% in September from 3.6% in August against 3.4% anticipated. Inflation in the UK has cooled to its lowest level since April 2021 and may induce the BOE to start cutting interest rates more aggressively. 

GDP data showed that the British economy grew unexpectedly in August. The UK economic outlook has improved as the British economy expanded by 0.2% in August after remaining stagnant in June and July. The British economy expanded by just 0.5% in the second quarter of the year, failing projections of 0.6% and following 0.7% growth in the first quarter of 2024. 

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JPY

USD/JPY surged from 151.4 to 154.5 on Wednesday as the dollar rallied. The currency rate rose precariously close to the 155.0 level, which may trigger another BOJ intervention to support the Yen. If the USD/JPY pair declines, it may find support at 151.2. If the pair climbs, it may find resistance at 155.0.

The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its policy meeting last week. The BOJ had pivoted to a more hawkish policy at its meeting in July, raising interest rates by 15 basis points, the BOJ’s largest rate hike since 2007. The BOJ had already hiked interest rates once more in March, ending its negative interest rate policy. 

Markets were not expecting a change in policy in last week’s meeting and focused instead on the BOJ’s forward guidance. BOJ Governor Kazuo Ueda delivered a hawkish speech after the policy meeting, boosting the Yen. Ueda hinted at another rate hike in the following months, if economic and inflationary conditions are met. Data emphasized, however, that the BOJ’s policy will be data-driven and stated that the central bank will scrutinize data before each policy meeting. 

Inflation in Japan dropped to 2.4% year-on-year in September from 2.8% in August against expectations of a 2.3% print. BOJ Core CPI remained at 1.8% year-on-year in August, the same as in July. Annual Tokyo Core CPI fell to 1.8% in October from 2.0% in September, which was in line with expectations. Inflation in Japan remains weak lowering the odds of another BOJ rate hike this year.

Japan’s economy expanded by 0.7% in the second quarter of the year. The Japanese economy has started to expand, after shrinking by 0.5% in the first quarter of the year. 

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Written by:
Myrsini Giannouli

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