Written by Convera’s Market Insights team
Trump trade returns
George Vessey – Lead FX Strategist
Despite a short-term pullback earlier this week on de-escalating tensions in the Middle East and a 5% fall in oil prices, the US dollar index is back at a fresh 11-week high. What’s interesting is that 10-year US yields have dipped lower this week, which suggests traders are seeking safety in bonds and the dollar ahead of the plethora of uncertain events looming.
The dollar is also arguably stronger of late because of the rising odds of a Donald Trump victory in the US election just three weeks away. Trump has taken over the lead in an average of the polls in the seven swing states for the first time since Harris got in the race. Everything is still within the margin of error and incredibly close — just 0.34 percentage points separate Trump and Harris. But the consistency of the change and the fact that it’s all in Trump’s direction, has Democrats concerned. Financial markets are also reacting. A Trump victory is seen as inflationary, hitting global trade, potentially reducing Fed rate cuts. This means higher yields, a stronger dollar (in the short term), higher equities and cryptocurrencies.
Reflecting the heightened uncertainty around the election, a measure of US equity volatility (VIX index) has remained above a key level for the longest streak in more than two years. It’s unusual for the VIX to be above 20 when the S&P closes at a new all-time high as it has done lately. However, such a stretch above this level has often coincided with a brief reversal of equity gains, which could also hit risk sensitive major FX like AUD, NZD, NOK and GBP. Indeed, the risk and trade channels are typically the most important transmission mechanisms of how the US election impacts currencies. A Trump presidency would therefore be more impactful for markets than a win from Harris due to the latter focusing more on domestic issues.
Pound near 2-month low
George Vessey – Lead FX Strategist
One-month implied volatility in GBP/USD remains close to 2024 highs amidst the looming US election and central bank meetings. Looking at seasonal trends, volatility tends to stay elevated going into year-end, especially in these years when Americans head to the polls. But it’s not just a stronger US dollar amidst a rising Trump victory hurting the pound, but also the dovish shift in Bank of England (BoE) rate expectations in the wake of UK data this week.
UK headline consumer inflation dropped to 1.7%, a 3-year low, and 0.4pp below the August BoE forecast, with airfares driving a big reduction in services inflation. Services inflation is now around 0.6pp below the BoE’s August forecast too. This adds to our conviction that the UK central bank will move to back-to-back 25 basis point cuts from November, validating Governor Bailey’s conditional statement that, if positive progress on inflation continued, rate cuts could be a bit more aggressive. This is especially the case when combined with softening wage data and the expectation of easing GDP growth in the third quarter. These domestic developments drove UK yields sharply lower yesterday and sent GBP/USD under the psychological $1.30 handle for the first time since August.
The options market helps understand FX sentiment. With 1-week and 1-month risk reversals for GBP/USD in negative territory once again, there is a bias towards protecting against further GBP weakness, or USD strength. The 100-day moving average support level of $1.2954 is our next downside target beyond which the 200-week moving average at $1.2844 and the 200-day at $1.2794 come into focus.
Euro down as Trump gains
Boris Kovacevic – Global Macro Strategist
The euro has now fallen in 14 out of the last 16 trading sessions as downward pressure continues to build before the highly anticipated rate decision by the European Central Bank (ECB) today. Policy makers are widely expected to continue their easing cycle with another 25 basis point cut.
Some weeks ago, markets didn’t see the need for rates to change. However, weak macro data and inflation below target in most European countries has recently led to a dovish repricing as Governing Council members warmed up to the idea of lower rates. The Fed is not anymore expected to lead the easing cycle in the developed world, meaning that the rate outlook has stopped being a disadvantage for the Greenback.
The rise of Trump in betting markets and an increased probability of a red sweep have added to the euro’s worries. Downside momentum has been incredibly strong, but the move seems to approach overstretched territory. Still, a significant data miss from the US is needed to give the euro some breathing space.
EUR & GBP still down despite oil’s 7% plunge
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 14-18
All times are in BST
Have a question? [email protected]
*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.
