Pound, Euro Tank vs Dollar: US Election Ignites Huge Moves Across Markets

November 7, 2024 - Written by David Woodsmith

STORY LINK Pound, Euro Tank vs Dollar: US Election Ignites Huge Moves Across Markets

Donald Trump is the new US President.

Markets have made significant moves in the last 24 hours.

EURUSD is –2% lower, while stocks and Bitcoin are trading at new all-time highs.

Donald Trump is the new US President and the Republicans also took control of the Senate and are likely to control Congress.

The market reaction was emphatic. Stocks and Bitcoin are at new all-time highs, the USD is higher, as are yields, and commodities are lower. These moves are tied to Trump’s proposed policies and a possible inflationary boom.

The Policies

Trump’s policies revolve around 3 key issues, as described by ING:

“Extend and modify the Tax Cuts & Jobs Act which is currently scheduled to expire at the end of 2025, accompanied by lower corporate taxes and exempting tips from taxation.

Restrict immigration, particularly from the Southern Border and,

Implement tariffs that he believes will raise revenue, promote re-shoring of production and boost economic growth and jobs.”

Lower taxes are likely inflationary and could push up yields. Firstly, they will boost spending and consumption. Secondly, they will likely lead to higher UST issuance to cover shortfalls. Increased supply equals higher yields.

Restricting immigration is another inflationary measure. Immigration boosted the US labour force following Covid when many US citizens stopped working. Vacancies surged and cheap labour from immigrants filled many of those positions. Curbing immigration and deportations are popular policies but have the disadvantage of reducing the workforce, especially in low paid jobs many Americans are unwilling to do. The result will be higher wages and this will be inflationary.

“Reduced immigration and forced repatriation could become a major constraint on the US economy, particularly in industries such as agriculture... Employment growth is coming from foreign-born workers, who now make up 19.5% of all US employees. If the foreign-born workforce also shrinks, it could create significant supply-side challenges, driving up wages and inflation,” note ING

Tariffs are also likely to cause inflation. They will raise the price of imports and the increased costs will be passed down to consumers. US produced goods are still likely to be more expensive than imports, especially if there is tightness in the labour market.

Market Impact

Yields have been rising in expectation of a Trump victory for over a month and are significantly higher on Wednesday. The 10Y is around 4% higher and nearing 4.5%. Long bonds (TLT) have collapsed over 3%.

Yields are pricing in a “higher for longer” policy approach by the Fed as inflation is expected to bounce back and limit plans to cut rates. Already the odds of December cut have fallen from around 90% to 70%. Cuts further out in 2025 may also be priced out.

Higher yields are good news for the USD and Trump’s policies are expected to boost USD exchange rates. This can be seen clearly in Wednesday’s USD moves as the DXY dollar basket has broken to new 3-month highs and EURUSD has crashed over 2% to a low of 1.068. Other pairs have fared slightly better and EURGBP is down by -0.6% to 0.833.

Stocks soared to new highs as they did in 2016 when Trump first became President. Lower corporate taxes are clearly a positive for earnings.

Bitcoin also broke to new all-time highs. Trump himself has turned from a Bitcoin critic to a supporter and has surrounded himself with people heavily invested in cryptocurrency. There has been talk of the formation of a Bitcoin strategic reserve, and mining operations. Whether any of this unfolds or not, clearly a Trump administration will be very supportive of cryptocurrency and it has been reflected in the moves in Bitcoin in the last month or so.

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TAGS: Pound Euro Forecasts