Trump wins with FX reaction as expected so far

USD: A Republican clean sweep to fuel dollar strength, higher yields

Former President Donald Trump is on his way to the White House again with remaining votes in Pennsylvania not enough to lead to Harris taking a state that is looking essential for a road to the White House for the Democrats. With Pennsylvania lost Associated Press has just called the election for Trump. EUR/USD is now 1.9% lower and we see scope for this drop to extend further lower from here. If anything this election result is looking closer to a landslide relative to how close this election was anticipated to be. The figures look to be showing Trump winning over 300 electoral college votes that will be a huge endorsement of the policies he has been campaigning on. Trump won 304 electoral college votes in 2016 but a key difference in 2024 is that Trump is on track to win the popular vote which will reinforce Trump’s determination to implement the policies he campaigned on. We are reportedly going to hear from Tump soon which may come prior to an official call on his victory but that won’t matter on this occasion. Harris has indicated she will not speak to the nation until tomorrow when she will of course be conceding defeat.

We indicated in our FX Outlook in October and November that a Trump victory would lead to a potential 7-8% stronger US dollar relative to the forecasts if Harris won. That implied EUR/USD dropping below the 1.0500-level (to around 1.0300-1.0400) by the end of this year. We also suggested a possible initial gain for the dollar over the first 24hrs of 2-3% and the DXY as of now is up close to 1.9%. What kind of speech Trump gives when he speaks this evening may provide some sign of initial policy focus but there is no reason not to believe that he will focus on tax cutting policies (if the Republicans win the House); trade tariffs and deportations. All inflationary and all therefore likely to lift yields and the US dollar.

US yields are perhaps not moving higher as much as we anticipated but this is likely a reflection of the House election still not confirming a clean sweep for the Republicans at this stage. The Senate has already fallen to the Republicans as expected. Currently in the House the Democrats have 157 seats to the Republicans 190. But within that 190 total for the Republicans are three flips from the Democrats which points to the potential for the Republicans holding on to its majority. Of course there are different kinds of clean sweeps and only a marginal majority could be seen as a potential curtailment of some of Trump’s fiscal policies with the potential for moderate Republicans to block big spending policies.

A quick look at voter issues in this election and voting patterns and it is clear that the economy was the big issue for the voters and that the hoped for focus on abortion that could have swung the vote to Harris via a strong female vote did not materialise. The OIS is priced at close to 100% for a Fed cut of 25bps tomorrow which we would agree with but beyond that the Fed will likely be a lot more cautious until the scale of any fiscal spending package is known. The OIS curve though today is a lot better priced for a Trump victory with just 100bps of cuts over the next 8 meetings to September 2025. That was closer to 200bps a month ago. We will provide further updates to our readers including precise new forecasts over the coming days but will be based off that premise of roughly a 7-8% DXY gain relative to our Harris forecast levels for the dollar vs G10 FX.

TRUMP WINS WITH A MUCH LARGER SHARE OF THE VOTE THAN IN 2016

Source: ABC News; as of 06:30 GMT

GBP : FOMC & BoE decisions to be made post-election

As stated above, we expect the FOMC will cut by 25bps tomorrow given the weaker jobs report last Friday. Fed Chair Powell himself explained after cutting by 50bps in September that the FOMC only focus on the economic data in front of them in making a decision and in that sense given the inflationary risks have not worsened and the jobs market is somewhat weaker cutting 25bps tomorrow and then taking more time before the December FOMC to determine whether a pause is then appropriate.

For different reasons, the BoE finds itself in a similar position ahead of its MPC meeting tomorrow. The election uncertainty aside, the MPC must deliberate the potential inflation risks from the budget announced on 30^th October which contained substantial front-loaded government spending increases. There is an inherent risk in front-loading government spending – if your projected revenues fall short due to unrealistic projections or due to weaker growth then more borrowing may be required at a sooner date. This increases the inflation risks. The OBR raised its inflation projection for next year from 1.5% to 2.6% although only about 0.4ppt was directly related to the budget. A GBP 3.75bn 10-year Gilt auction yesterday recorded the weakest demand (bid-to-cover 2.81 times) since December which admittedly likely only partly reflects budget concerns given yields increased everywhere yesterday as UST bond yields increased on good US data and positioning ahead of the election result.

We still expect the BoE to cut tomorrow. The annual inflation rate fell sharply from 2.2% to 1.7% in September with services inflation dropping sharply from 5.6% to 4.9%, 0.6ppt lower than the MPC assumed. Bloomberg yesterday reported its own analysis that revealed one-third of 220 goods and services in the CPI basket were recording a deflationary annual rate, the most since covid depressed prices. BoE Governor Bailey hinted at scope for the MPC to be “a bit more aggressive”. The budget though could mean that the communication leaves open the prospect of a pause in December, something that might help reduce risks of longer-term yields spiking in inflation concerns. GBP near-term could outperform other G10 currencies given its predominant export to the US is services not goods leaving it less exposed to the tariff plans under the upcoming Trump presidency.

BOE CAN BE MUCH MORE CONFIDENT THAT THE INFLATION SHOCK IS OVER

Source: Bloomberg & Macrobond

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
FR	08:50	French S&P Global Composite PMI	Oct	47.3	48.6	!
FR	08:50	French Services PMI	Oct	48.3	49.6	!!
GE	08:55	German Composite PMI	Oct	48.4	47.5	!
GE	08:55	German Services PMI	Oct	51.4	50.6	!!
EC	09:00	S&P Global Composite PMI	Oct	49.7	49.6	!!
EC	09:00	Services PMI	Oct	51.2	51.4	!!
UK	09:30	Construction PMI	Oct	55.3	57.2	!!
EC	10:00	PPI (YoY)	Sep	-3.5%	-2.3%	!
EC	10:00	PPI (MoM)	Sep	-0.5%	0.6%	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-0.1%	!
EC	14:00	ECB President Lagarde Speaks	--	--	--	!!!
GE	14:10	German Buba Vice President Buch Speaks	--	--	--	!!
EC	14:30	ECB's De Guindos Speaks	--	--	--	!!
CA	15:00	Ivey PMI	Oct	54.2	53.1	!
GE	15:00	German Buba President Nagel Speaks	--	--	--	!!
CA	17:25	BoC Senior Deputy Gov. Rogers Speaks	--	--	--	!!
US	18:00	30-Year Bond Auction	--	--	4.389%	!!
CA	18:30	BOC Summary of Deliberations	--	--	--	!
NZ	19:10	RBNZ Gov Orr Speaks	--	--	--	!!!

Source: Bloomberg