Trump win: What can we expect in FX in the coming days?

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What has been behind the US Dollar rally?

As we outlined prior to the election, markets are clearly taking the view that another spell in the Oval Office for Donald Trump is a bullish development for the US dollar. We see this as largely a consequence of the below:

1) Trump’s preference for lower US tax rates. Proposals for sweeping tax cuts under president Trump, which are far more likely to pass under a GOP clean sweep, are seen as lifting near-term US growth, while leading to higher inflation and, most importantly for markets, higher Federal Reserve interest rates.

2) Greater protectionism means higher US tariffs, particularly on China and Europe. The implication here is that these tariffs could be a precursor to weaker global growth under Donald Trump. This is a scenario that would see investors favour lower risk assets, including the dollar itself, at the expense of higher risk currencies, notably those that are acutely exposed to the global economic cycle.

3) Another Trump term may ensure higher geopolitical uncertainty, which is also not favourable for risk appetite. Support for Ukraine is not guaranteed, nor does Trump hold a particularly favourable view towards NATO.

What can we expect in FX in the coming days?

So far, we would perhaps argue that the moves in the FX market have been somewhat contained relative to expectations from some quarters. It is very early days, however, and we would expect volatility to remain elevated in the next few trading sessions, as investors position themselves in anticipation of another Trump presidency. This could mean fresh downside in risk assets and another bout of dollar strength, particularly should the Federal Reserve hint to markets at upcoming policy meetings, potentially on Thursday, that the outcome of the election may slow the pace of the Federal Reserve cutting cycle.

For now, of course, nothing changes. President Biden will remain in the top job until early next year, and we will have to wait until 20th January 2025 for Trump’s inauguration. His rhetoric in the meantime will be closely watched by market participants. Commentary that doubles down on his tariff threats and tax cuts could conceivably exert some additional upward pressure on the greenback, as investors pencil in weaker global growth and a higher terminal Federal Reserve interest rate.