USD: Back to fundamentals for the US Dollar – ING

Betting markets currently give the Republicans a 93% chance of winning the House and therefore a clean sweep. Global financial markets reacted to the prospect of Donald Trump having carte blanche to pursue his policy agenda by: buying the dollar, re-pricing the Fed easing cycle higher, selling (especially longer-dated) US Treasuries, buying US equities and punishing those likely to be on the receiving end of his trade policies, such as BMW who's shares were marked down 7% yesterday, ING’s FX Analyst Antje Praefcke notes.

“The challenge for investors is how to position now. The US election event risk has passed with a surprisingly clean outcome, but Trump's policy agenda will not emerge until 2025, and perhaps not even until late in 2025. Before then, however, the market will be subject to his social media posts and presumably his choice for top posts in his administration, such as the next US Treasury Secretary.”

“That is all for the future. Today very much presents a return to the state of the domestic economy and how central bankers will respond. The overriding position currently is one in which the disinflation process is true and restrictive interest rates are no longer required. That should be the core story from today's FOMC meeting, where the market fully prices a 25bp rate cut. We doubt Chair Jay Powell is ready to endorse the market's less dovish re-pricing of the Fed's easing cycle by saying prospective Republican policy is inflationary.”

“It would be a bullish dollar surprise if he did. We do not think there is a strong reason for the dollar to hand back much of its recent gains. But it would not be a surprise to see DXY undertaking some well-earned consolidation in the 104.50-105.50 area as investors try to better understand the timings of the next market drivers.”

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