• USD Strength Continues: The dollar is expected to stay strong into 2025, bolstered by Trump’s policies; short-term pullbacks offer buying opportunities.
• Republican Control Boosts Policy Direction: With Republicans in control, Trump’s administration is set for streamlined, pro-dollar policies, though Senate dynamics may introduce slight friction.
• Potential for Temporary USD Pullback: While dollar positions are high, upcoming data (like PPI) or a cautious tone from Fed Chair Powell could trigger a short-term dollar correction.
• EUR Faces Persistent Downside Risk: EUR/USD remains pressured by a widening risk premium tied to U.S. protectionism, likely capping any significant EUR rallies.
• GBP Awaits BoE Signals: GBP/USD weakens as markets eye BoE Governor Bailey’s speech for potential policy direction; limited rate cuts may keep GBP behind other currencies.

USD: Bullish Momentum Holds Firm
As we head into 2025, our primary FX guidance is to lean into the USD’s strength, supported by the direction of Trump’s trade and domestic policies. This week’s market movements hint at what we may expect: brief dollar dips—like the post-CPI pullback—are potential entry points for long-term USD investments.

On the political front, the Republican House win confirms Trump’s full control over government until the 2026 midterms. With cabinet roles largely filled by Trump allies, a streamlined decision-making approach seems likely. However, potential friction may arise with Senate Republican Leader John Thune, a free trade advocate, as Trump continues to push his protectionist agenda.

Despite a robust USD outlook, short-term dynamics show some caution. With high long-dollar positions, a broader (though likely brief) USD pullback could occur, potentially triggered by today’s PPI release—a key indicator for the Fed’s inflation measure, the core PCE. Any weaker-than-expected figures might put temporary downward pressure on the dollar.

Another major event today is Fed Chair Jerome Powell’s Dallas speech. His remarks on the economy, particularly in light of recent inflation data, could signal a softer tone, especially if he distances Fed policy from Trump’s trade moves. Such dovish undertones could prompt the USD OIS curve to price more easing for mid-2025.

In case of a USD pullback, DXY may not fall below 106.0, and buying interest is likely to resume quickly.

EUR: A Risk Premium on the Horizon
The persistent short-term USD/EUR rate spread continues to drive EUR/USD down, but a growing risk premium—linked to U.S. geopolitical and trade risks—could signal further euro downside. This emerging 1.5%+ risk premium reflects a “new normal” of euro-negativity amid Trump’s foreign agenda, with potential for an even larger premium if markets price in more trade-related risks.

While a brief EUR/USD upside correction is plausible, we expect traders to sell into rallies, limiting sustained gains above 1.070. Today’s eurozone data, including EZ GDP revisions and ECB minutes, could offer mild support for EUR, though markets may await more definitive signs of a slowdown before anticipating a 50bp ECB rate cut in December.

GBP: BoE’s Approach Under the Microscope
GBP/USD is trending lower around 1.2685 as USD strength dominates. Today, BoE Governor Andrew Bailey’s speech may give insight into the BoE’s policy direction. BoE’s Catherine Mann recently suggested that inflation’s sensitivity to policy could allow the bank to pause major rate cuts. The market currently anticipates only two 25bp cuts by 2025, placing the BoE behind other central banks. Any less dovish signals from Bailey could bolster the GBP against the USD.