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The US dollar climbed yesterday as markets reacted to Donald Trump's victory. Editorial credit: Peter Serocki, via Shutterstock
Yesterday’s election drama quickly faded into realism as currency markets pivoted to life under president-elect Donald Trump. A long night (or early morning) watching the results did not prevent focus from shifting to today’s doubleheader of interest rate decisions from the Bank of England and the Federal Reserve.
The US dollar’s Trump-fuelled rally topped out around Midday but not before it had climbed by over 1% against the pound and the euro. Despite expectations of a quarter point rate cut today, GBP/EUR finished the session at its highest level this week and close to its recently established two-year high.
Donald Trump will be the subject of many column inches over the coming weeks and months. There are massive question marks around his trade and geopolitical policies, which could cause huge volatility in currency markets should they be implemented. According to analysis from the National Institute for Economic and Social Research (NIESR), Britain’s economy and monetary policy could be significantly affected by tit-for-tat trade tariffs.
Having withstood one major event, markets must now dust themselves down and confront two key central bank set pieces. In the City of London, the Bank are roundly expected to cut interest rates from 5% to 4.75%, presenting a further risk to the pound in this busy week.
The Federal Reserve will then make its own decision tonight. An identical quarter point cut to 4.75% is again on the menu but markets will be watching Jerome Powell for any clues as to whether the election result has changed the outlook.
A disagreement at the heart of the German political coalition is likely to lead to a snap election in March. Chancellor Olaf Scholz addressed the nation last night after finance minister Christian Lindner was sacked and the Free Democratic Party (PDF) withdrew its members from government. This morning also brought news that the German trade deficit narrowed to €17bn in September, piling more pressure on the euro.
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GBP: Matching trims?
The Bank of England and the Federal Reserve could cut interest rates by 0.25% today. The danger for the pound is that its lead is not followed by the Fed, resulting in a divergence in policy that looks all the starker given the US dollar’s momentum.
GBP/USD: the past year
EUR: German PMI struggles
The euro had a tough time yesterday against its main rivals. That came on the back of election news and the final results of the HCOB German PMI studies for the services sector and the composite data, which both fell from September last month.
GBP/EUR: the past year
USD: Powell set for Trump faceoff
Jerome Powell has a famously frosty relationship with Donald Trump. He may have been more upset than most on Wednesday morning but his role requires an unflinchingly focused attention. Expect US dollar volatility around the Fed’s press conference, which is likely to see questions around the future path of interest rate cuts.
EUR/USD: the past year
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