Dollar rises on expectations of Trump policies

Important calendar events

• JPY: M2 Money Stock, Preliminary Machine Tool Orders
• EUR: German Final CPI, German WPI, German ZEW Economic Sentiment, ZEW Economic Sentiment
• GBP: Claimant Count Change, Average Earnings Index, Unemployment Rate, Monetary Policy Report Hearings
• USD: NFIB Small Business Index, Cleveland Fed Inflation Expectations, RCM/TIPP Economic Optimism, Loan Officer Survey

USD

The dollar surged after announcing Trump’s victory in the U.S. presidential elections last week and continued to rise on Monday as markets anticipate Trump’s new fiscal policies. The dollar surged from 104.9 to 105.5 on Monday. US treasury yields retained Friday’s closing value, as Monday was a US Bank Holiday, with the US 10-year bond yielding 4.31%.

Trump’s proposed tariffs and tax policies are expected to support economic growth, boosting the dollar. In addition, the import tariffs imposed are expected to drive inflation higher. This may force the Fed to keep interest rates at restrictive levels longer.  

The US Federal Reserve cut interest rates by 25 basis points last week to a target range of 4.50% to 4.75%. The Fed had already launched its easing cycle in September, with an aggressive 50-bp rate cut, signaling the end of its restrictive monetary policy. The dollar dipped after the Fed policy meeting, even though the rate cut had been fully priced in by markets. 

Fed Chair Jerome Powell stated that disinflation progress is steady, and the labor market is strong, permitting a shift towards a more neutral monetary policy. The odds of another rate cut in December are currently approximately 65%.

Powell allayed fears that he would be forced to step down by Trump’s administration. Powell stressed that it is not permitted under the law for the US President to remove the Fed Chair, indicating that he intends to complete his term of office, until May 2026. 

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.

This week we expect to see increased volatility in the price of the dollar as key economic data are scheduled to be released. Markets this week will focus on US Consumer Price Index (CPI) data coming up on Wednesday. Headline inflation in the US is expected to remain steady at 2.4% annually in October, resisting the Fed‘s efforts to bring it down. US Producer Price Index (PPI) data on Thursday, will provide a more complete picture of the US inflation outlook. Retail Sales data coming up on Friday are strong indicators of economic activity.

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EUR 

EUR/USD dipped from 1.072 to 1.064 on Monday as the dollar gained strength. If the EUR/USD pair declines, it may find support at 1.060, while resistance may be encountered near 1.093.

The Euro has been under pressure due to political turmoil in Germany, the Eurozone’s leading economy. German Chancellor Olaf Scholz fired Finance Minister Christian Lindner, causing the collapse of the three-party coalition that was ruling Germany. The country will be headed towards elections and political instability is expected to cause volatility in the Euro in the coming months.

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.

German ZEW Economic Sentiment and EU ZEW Economic Sentiment data are due on Tuesday and will provide information on economic sentiment and health in the Eurozone. German Final CPI data are also scheduled to be released on Tuesday and are expected to show that German inflation rose by 0.4% in October. 

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GBP 

GBP/USD dropped from 1.291 to 1.286 on Monday as the dollar surged. If the GBP/USD rate goes up, it may encounter resistance near 1.304, while support may be found near 1.283.  

BOE policymakers voted with a strong majority of 8-1 to cut rates to 4.75% last week. Bank of England Governor Andrew Bailey stated that the central bank intends to adopt a gradual approach to cutting interest rates. This would give policymakers time to assess the impact of the Government’s new budget on inflation. 

Britain’s new Labour Government announced its first budget earlier this month, 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. 

GDP data are due on Friday and are expected to show that the British economy expanded by 0.2% in September, maintaining a steady expansion rate. Preliminary GDP data are also due on Friday and are expected to show that the British economy expanded by 0.2% in the third quarter of the year.

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JPY

USD/JPY surged from 152.6 to 153.9 on Monday, driven by the dollar’s rise. 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 latest policy meeting. 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. 

BOJ Governor Kazuo Ueda’s forward guidance was hawkish, boosting the Yen. Ueda hinted at another rate hike in the following months, if economic and inflationary conditions are met. Ueda emphasized, however, that the BOJ’s policy will be data-driven and stated that the central bank will scrutinize data before each policy meeting. 

The BOJ Summary of Opinions published on Monday showed that Japanese policymakers are divided over the timing of future rate cuts. According to the report, BOJ board members expressed diverging opinions on future rate cuts at the latest policy meeting in October.

USD/JPY rose precariously close to the 155.0 level last week, which is considered a line in the sand for another intervention in support of the Yen. Japan’s Finance Minister Katsunobu Kato warned markets that Japan’s government is prepared to respond to excessive Forex moves against the Yen. Kato stresses that the Japanese government will monitor closely the impact of Trump’s policies on Japan’s economy. Incoming US President Donald Trump has promised in his presidential campaign to raise import tariffs by 10%, which will affect Japan’s exports to the US. 

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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