Written by Convera’s Market Insights team
Fed not fazed by Trump, for now
Boris Kovacevic – Global Macro Strategist
The pro-growth agenda of president-elect Donald Trump has arguably made the job of Fed Chair Jerome Powell more difficult going into next year. While yesterday’s decision to cut interest rates by 25 basis points to 4.5% has not been altered by political considerations and had been well telegraphed, some details suggest that the December meeting might be more nuanced. The Fed has already eased policy b 75 basis points to keep the economic expansion alive. The committee noted that labor market conditions have generally eased but removed the comment that job gains have slowed. Equally, the phrase regarding the FOMC gaining greater confidence that inflation is moving towards the 2% target has been cut as well. That was enough for investors to push back expectations on the next rate cut from December to January. We remain under the impression that a rate cut at the next meeting seems likely. One reason for this is the time needed for the administration to implement changes.
While the Fed sees itself as being impartial, the policy agenda of the White House does have an impact on the economy and therefore monetary policy. Jerome Powell intends to finish his four-year term ending in May 2026 despite clashing multiple times with Donald Trump during his first presidency. It took Trump around a year to push the tax cuts and tariffs across the finish line. These two developments make it likely that Powell will not have to think too much about the Trump agenda next year. This will change the year after, where policies such as 1) deportations, 2) tariffs, 3) expansive fiscal policy, and 4) tariffs could start impacting the Fed’s inflation projections and therefore interest rates.
The uncertainty surrounding government policy and the overall outperformance of the US economy have led investors to significantly push back on their rate cutting expectations for 2025. Options markets are pricing in three additional rate cuts until the Fed ends the easing cycle at 3.75%. The growth agenda of Trump and investors paring back easing bets have pushed the US dollar to its highest level since July 2023. The Greenback is set to appreciate for a sixth week in a row. However, yesterday’s pullback despite the hawkish Fed statement seems to indicate some short-term exhaustion of relentless dollar buying. The same can be said for the selling of government bonds but not for equities, which remain at record highs on the aggregate level (S&P 500, Nasdaq, Dow Jones).
Hawkish BoE cut helps pound
George Vessey – Lead FX Strategist
The Bank of England (BoE) reduced its benchmark interest rate by 25bps to 4.75%, as the consensus and markets expected. Eight of the nine policymakers voted to cut, and one voted against. The pound rebounded after heavy losses versus the USD on Wednesday, driving GBP/USD back towards $1.30. However, given sterling’s depreciation against high beta peers, it appears that broader global sentiment and the fading of “Trump trades” was the main driver of FX price action.
Nevertheless, the BoE’s update was interpreted as hawkish. Policymakers emphasised the need for restrictive monetary policy, favouring a gradual easing approach. The central bank projected inflation to rise from 1.7% to around 2.5% by year-end. Additionally, it estimated a GDP lift of approximately 0.75% at peak impact within a year, with a temporary inflation increase of nearly 0.5 percentage points. These upgrades were largely a result of the expected tightening of fiscal policy beyond next year in the wake of the UK Budget. The chance of a December rate cut, therefore, looks remote and traders continue to expect just two more quarter-point reductions from the BoE by the end of next year, with just under a 50% chance of another.
Thus, relative rate differentials continue to support sterling for now, especially against the more vulnerable and lower yielding euro. GBP/EUR holds above €1.20, 4% up year-to-date and five cents above its 5-year average.
Euro sensitive to Trump news
Boris Kovacevic – Global Macro Strategist
The firing of German finance minister Christian Lindner by Chancellor Olaf Scholz has opened the door for a snap elections early next year and has added another pressure point for the euro. The breakdown of the coalition means that uncertainty and a lack of policy flexibility will prevail for now. The initial reaction of investors has been to sell German government bonds as the potential replacement of the fiscal hawk Lindner could be met with more bond issuance.
The 10-year yield is on the track to rise for a third week and is currently trading at around 2.44%. Despite the political turmoil in Germany and Donald Trump winning the US presidency, the European Central Bank is expected to lower its key policy rate by another 25 basis points in December. The slight dovish repricing as of late can be seen as a function of traders expecting a negative impact of tariffs on economic growth. However, the Trump agenda might create a trade off in which inflation is pushed higher, leading to less policy easing.
For now, the euro remains incredibly sensitive to news on the global front. EUR/USD is trading around $1.0770 but the current bias increasingly favors the downside as research departments across the world start lowering their year-end forecast for the currency pair. The ECB is likely to outcut the Fed and German growth will remain subdued next year. However, the $1.05 mark will only be broken if Trump implements the 20% broad tariff on all US imports.
Pound outperforming euro
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 4-8
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
