Summary | Trump’s New World Order

More USD appreciation but set to reverse in H2 2025

Trump Trade well priced but some more USD strength still likely  

• Economic resilience is certainly one way in which 2024 will be remembered in relation to the US economy. After calendar year growth of 2.9% in 2023, real GDP is expected to slow only very modestly to 2.7% this year. The election victory for Donald Trump has lifted growth expectations but the economy is still expected to slow to around 2.1% in 2025. Monetary policy remains restrictive and Trump’s planned tax cuts if legislated for will not hit the economy until 2026.
• Core PCE Inflation fell sharply this year from 3.8% in 2023 to an expected 2.5% this year. The consensus is for a further decline in 2025 to 2.1%. However, this consensus precedes Trump’s election win and the planned tariff increases will certainly mean inflation will be higher than originally expected, curtailing the extent in which the Fed can cut rates in 2025.
• This means the Fed will now cut rates by less than we originally expected in 2025. Assuming the FOMC cuts on 18th December, we expect a further three cuts in 2025 – broadly similar to market pricing.
• Despite the US economic resilience in 2024, the weak economic conditions in Europe and China, the US dollar at the end of September was weaker on a year-to-date basis, by 0.5% on a DXY basis. The election victory for Donald Trump then saw the dollar surge nearly 7%. Trump policy action is well priced by we see scope for further gains in Q1-Q2 before the dollar weakens as cyclical forces drive the economy weaker and sees the FOMC continue to cut rates.

ECB priced to cut rates aggressively further – tariffs risks may be overblown 

• Growth in the euro-zone remains depressed and headwinds in 2025 will remain notable. Still, with real income growth set to accelerate the consensus is for real GDP growth to accelerate modestly from 0.8% this year to 1.2% next year. Progress on containing inflation is set to continue. Core inflation fell from 5.5% last year to an expected 2.4% this year and the consensus is for core inflation to drop to 2.0% in 2025. Tariff retaliation points to upside inflation risks.
• The ECB is likely to lower the key policy rate to 2.00% in 2025 which currently is close to 50bps less than implied by the OIS market. In our view, the inflation risks are being ignored at the expense of growth risks but this doesn’t reflect the ECB’s likely behaviour. Fewer rate cuts in 2025 than priced should allow EUR/USD to modestly recover in 2H 2025.

The BoJ may hike in Dec and certainly in 2025 helping JPY to outperform 

• We expect the BoJ to hike by 25bps in December and if not December, then January. We then expect the BoJ to hike rates twice further in 2025 to reach a level of 1.00%, close to the bottom of the range for the neutral rate. The ‘Shunto’ wage negotiation period in Spring 2025 will be important and should provide the justification for the BoJ to proceed with further monetary tightening. A shrinking US-JP yield spread and increased volatility will help drive the yen stronger.
• The shrinking US-JP yield spread implies cheaper hedging costs for Japanese investors in the US and increased hedging of Japan investors’ holdings of foreign bonds will add to the yen’s upward pressure.

Wage concerns in the UK will likely persist and keep the BoE cautious & GBP stronger 

• The pound is currently the top performing G10 currency in 2024, having managed to advance even against the strong dollar. In 2023 the pound was the second best performing currency. The economy performed well in H1 2024 but has since slowed although growth is set to pick up from an expected 0.9% this year to 1.5%i n 2025.
• The new Labour government has not got off to a good start with unpopular tax increases. However, the government spending will be front-loaded which will help support the economy next year.
• The labour market will be the primary focus for the BoE and if Trump acts with widespread tariffs that leads to retaliation the potential inflation threat will have implications for the BoE. We see GBP performing best against the euro over the nearer-term (Q1 into Q2 2025) and expect new EUR/GBP lows not seen since the Brexit referendum in June 2016 before broader US dollar weakness sees GBP gain more versus the US dollar.

Trade disruption will create challenging backdrop for commodity FX

• We expect global trade volumes to slow in response to a further shift to more protectionist policies during Trump’s second term. Global commodity prices and related currencies such as the AUD underperformed at the start of the first trade war between China and the US between 2018 and 2019. We expect a similar challenging backdrop for G10 commodity currencies at the start of Trump’s second term.
• Trump has already singled out Canada and China amongst his initial targets threatening to impose 25% and a further 10% tariff on all goods. While we do not expect Trump to follow through and impose significantly higher tariffs on Canada, trade policy uncertainty is likely to linger during next year ahead of the upcoming USMCA review in 2026 weighing on CAD.
• In contrast, it is more likely that Trump will follow through and impose higher tariffs on China. Raising tariffs by a further 10% may only be an opening step as well. China has already revealed that it plans to step up policy stimulus to help offset the negative economic impact from trade disruption next year. We also expect Chinese policymakers to allow the CNY to weaken. The developments pose downside risks for the AUD although a bigger fiscal stimulus from Chinese policymakers could help to curtail weakness.
• The Scandi currencies of NOK and SEK have been two of the worst performing G10 currencies this year as have fallen back close to record lows. The challenging external backdrop alongside downside risks for the price of oil from an oversupplied market in 2025 favours a continuation of the current weakening trends.