- Trump claimed victory in the US presidential race.
- The Fed cut interest rates by 25-bps on Thursday.
- This week, market participants expect US inflation data.
Most currency futures fell on Friday, apart from the yen, as the dollar ended strong after Trump’s presidential win. The outlook for Fed rate cuts shifted slightly as analysts predicted higher inflation under Trump’s administration.
Dollar (Source: Bloomberg)
US political uncertainty ended on Wednesday last week as Trump claimed victory in the presidential race. The Republican candidate had proposed increasing tariffs on imported goods and lowering taxes, which would boost local businesses and lead to a spike in inflation. Such a future would mean a pause in Fed rate cuts that would strengthen the dollar. Consequently, currency futures dropped.
Meanwhile, the Fed cut interest rates by 25-bps on Thursday and maintained a cautious tone about the futures. Trump’s win put downward pressure on rate cut expectations. Nevertheless, policymakers kept from including fiscal policy changes in their outlook. Nonetheless, markets lowered the likelihood of a December rate cut from 83% to 65%. Furthermore, this likelihood will keep changing with incoming data.
This week, market participants expect US inflation data. At the same time, the US will release retail sales figures that will show the economy’s health. Higher-than-expected inflation or healthy consumer spending will lower the chances of a Fed rate cut again in December. On the other hand, cooler-than-expected inflation or weak sales will put more pressure on the US central bank to lower borrowing costs.
The Canadian dollar fell on Friday as data revealed a weak labor market, increasing BoC rate cut expectations. Employers hired 14,500 new workers, compared to expectations of 27,900. The Bank of Canada cut interest rates moving aggressively by 50-bps in October. Markets moved to price another such move in December. Therefore, the employment figures increased the likelihood of another super-sized rate cut to 60%.
Meanwhile, the euro fell as traders feared Trump’s import tariffs would impact the Eurozone economy. Notably, trade between the Eurozone bloc and the US might deteriorate if the US increases tariffs on imported goods. This would hurt the Eurozone economy and weigh on the euro.
The yen was an outlier as it gained against the strong dollar. Japan’s currency rose as Trump’s win increased the likelihood of more intervention or a BoJ rate hike to keep the yen from plunging.
