The Impact of Trump’s Victory on Currency Markets
Overview:
- The pound held steady on Monday after falling to a six-month low following Donald Trump’s victory in the U.S. presidential election.
- Sterling was last up 0.1% at $1.2627, from $1.2598 on Friday, its lowest since mid-May.
- Trump’s win caused the dollar to surge around 3% as investors bet trade tariffs and lower taxes will boost growth and inflation, leading to fewer Federal Reserve interest rate cuts.
Factors Affecting Currency Markets:
- Expectations of trade tariffs and lower taxes boosting growth and inflation have caused Treasury yields to rise sharply, lifting the dollar as U.S. bonds become more attractive.
- Sterling has fallen around 2.7% since the election, outperforming the euro which many traders believe will face higher U.S. tariffs.
- Recent sterling weakness is primarily due to U.S. dollar strength, according to investment director Matthew Amis.
Future Outlook:
- The UK economy contracted unexpectedly in September, with growth slowing to just 0.1% over the third quarter, leading to a sixth day of losses for the pound.
- Traders anticipate an 80% chance of the Bank of England cutting rates next month, with rates potentially falling by around 65 basis points to just above 4% by the end of next year.
- The relatively slow pace of expected rate cuts has supported the pound this year, with a 0.8% drop against the dollar in 2024 compared to a 4.3% decline in the euro.
Euro vs. Pound:
- The euro fell to a 2-1/2 year low against the pound early last week, as investors bet Trump’s tariffs would have a more significant impact on the euro zone than Britain.
- It was last up 0.23% at 83.70 pence, following the weak British data.
In conclusion, the impact of Donald Trump’s victory on currency markets has been significant, with the dollar surging and leading to fluctuations in both the pound and the euro. The future outlook for the pound remains uncertain, with potential rate cuts by the Bank of England likely to drive further movements in the currency. Traders and investors should closely monitor economic data and central bank decisions to navigate the evolving currency market landscape and make informed financial decisions.