How Trump’s Election Could Shake The Markets.

• USD Surge Risk: Goldman Sachs warns the euro could fall 10% and the yuan 12% if Trump and Republicans win, with high tariffs and domestic tax cuts boosting the US dollar.
• Dollar Strength: Investors are favoring the dollar ahead of the US election, supported by strong earnings and less aggressive Fed rate cuts; this trend may extend if Trump wins.
• Euro Struggles: The euro dropped to a 2.5-month low due to weak Eurozone car sales and dovish comments from ECB officials, but some hawkish voices expect rates to remain higher than pre-pandemic levels.
• GBP Weakness: The pound declined in quiet trading, awaiting a speech from BoE Governor Andrew Bailey, who might push for rate cuts if inflation continues to ease.
• Key Market Watch: The EUR/CHF pair and Eurozone PMI data are pivotal, as further weakness in sterling or euro could signal deeper declines for these currencies.

USD: Goldman Sachs Group Inc. has warned that the euro could drop by as much as 10% against the US dollar if Donald Trump and the Republicans win the upcoming US elections and enforce high global tariffs paired with domestic tax cuts. The bank anticipates that the strong US economy and relatively high interest rates will continue to bolster the dollar, but a Republican victory could extend this trend. In that scenario, the Chinese yuan could tumble by 12%. Investors are already flocking to the dollar ahead of the November 5 election, supported by robust US earnings and speculation that the Federal Reserve may ease off on interest rate cuts. While Goldman’s baseline outlook expects the euro and yuan to rebound by year’s end, the bank cautions that a deeper slump for both currencies is possible depending on the election’s outcome. Foreign exchange analyst Michael Cahill highlights the risk of significantly higher tariffs under Trump, which could shift trade terms and favor the dollar. If Trump wins and pushes tariffs on China, Mexico, and others, inflation could rise, keeping US interest rates elevated. This divergence in monetary policies could weaken the euro by around 3%, potentially dropping it from its current $1.08 to $1.05.

EUR: The euro slipped 0.13% on Tuesday, hitting a 2.5-month low after disappointing Eurozone economic data. New car registrations in the region fell for the second consecutive month in September, dragging the euro down further. Dovish remarks from ECB President Christine Lagarde and Governing Council member Olli Rehn also weighed on the currency. However, hawkish comments from Council member Jose Manuel Campa Escriva limited the euro’s losses, as he suggested interest rates would remain higher than pre-pandemic levels. Despite a weak growth outlook, which may increase disinflationary pressures, markets are still pricing in a 100% chance of a 25-basis point rate cut by the ECB in December, with nearly a 50% chance of a larger 50-basis point cut.

GBP: The British pound saw broad declines in quiet trading, with no major data releases influencing market activity. Investors are waiting for a speech by Bank of England Governor Andrew Bailey, who could maintain a dovish stance. Earlier this month, Bailey hinted at more aggressive rate cuts if inflation continues to ease, especially after September’s lower-than-expected CPI reading. However, hawkish members of the BoE might resist aggressive cuts if upcoming PMI data show continued economic strength. In the broader forex landscape, the US dollar remains the strongest performer, while the Japanese yen lags behind. Sterling is one of the weakest currencies this week, and further declines could signal a fall in the euro as well. In particular, the EUR/CHF pair is worth watching, as a break below 0.9332 could signal further downside, potentially leading to a retest of long-term lows near 0.9209. Much will depend on Thursday’s Eurozone PMI data.