Trump wants to “help” the Fed

The US dollar continues to stay strong on the FX market. The Euro is waiting for tomorrow’s ECB meeting. Lower inflation in the UK supports the scenario of a 25 basis point rate cut at the November meeting.

Polls influence markets

The currency market continues to be led by the US dollar. This is not entirely due to the actions of the Federal Reserve, as scenarios have not changed significantly in several days, but rather the discounting of Trump’s return to the presidency. Recent polling clearly indicates that the Republican candidate is gaining and is closer to a win, this can also be seen in bookmaker odds. The effects (increased yields) can also be seen in the bond market, as Trump’s economic strategies are expected to have an inflationary effect and consequently postpone interest rate cuts. The topics of the Federal Reserve and Trump has heated up in recent hours. The Republican candidate has once again shocked with a statement in which he claimed that it is the president who should tell decision-makers what to do with interest rates. This is nothing new, since a few years ago Trump wanted to limit the independence of the Fed, but it shows the direction we may be heading after his victory. Trump’s return to power is also potentially a plus for the stock market, where tax cuts are expected to support the financial side of companies. We mentioned the issue of inflation, which may influence the limitation of the Fed’s actions in the coming years and a lesser inclination to cut rates. This translates into a stronger dollar.

Don’t want to, but have to

The major currency pair in the world is drifting today just below the 1.09 mark. Despite the mixture of pro-dollar factors and rather negative ones for the euro, the southern movement has been halted. Perhaps this is also a phase of waiting to see what the ECB will do tomorrow. In theory, it announced at the previous meeting that rate cuts would occur once a quarter. However, the unsatisfactory economic situation on our continent suggests that action may need to be taken quicker. The market almost 100% priced in the scenario that we will see a cut in rates by 25 basis points tomorrow. Especially since traditionally hawkish members of the ECB in their statements indicated that market valuations regarding further action are adequate. Such a decision tomorrow may give the green light to a drop in EUR/USD to even 1.08. In the medium term, dovish ECB coupled with economic weakness may cause the rate to drop even lower to around 1.06. The situation can only change with the signal of an economic rebound, possibly from Germany.

Inflation gives the green light

There is also a lot happening in the UK, where every day brings new information in the context of possible actions by the Bank of England at the meeting on November 7th. Yesterday’s labour market data indicated a better situation, especially the pace of wage growth remains high (4.9%), which indicates that there may be a problem with further extinguishing inflationary pressure. Hence after the publication, the chance of a BoE rate cut of at least 25 basis points was reduced somewhat. Today, the situation has changed again, this time in favor of a scenario of reducing the cost of money. This concerns inflation data for September, which turned out to be lower than the 1.9% forecast at 1.7%. This is also a decrease compared to the previous month, where we saw 2.2%. The pound is losing on the FX market today, as the probability of a rate cut has again become the most realistic, GBP/USD is returning around 1.30, and EUR/GBP is oscillating around 0.8350.

Author: Krzysztof Pawlak, currency analyst at Walutomat.pl