• Trump Trade Boost: Anticipation of a Trump victory has led to strong “Trump trades” with the US dollar rallying as swing states lean Republican, potentially leading to a Republican “clean sweep” in Congress, which would impact market sentiment and the dollar.
• Dollar Rally in FX Markets: The dollar has strengthened broadly across G10 currencies, with the Canadian dollar showing the smallest losses due to benefits from US economic optimism and reduced tariff risks under a Trump administration.
• Treasury Yields Rise: Bear steepening in the Treasury yield curve reflects expectations of inflationary policies from Trump, with short-term USD swap rates hinting at higher Fed rate projections through 2025.
• Euro Weakens on Trade Fears: European markets are bracing for potential extended trade conflicts under a second Trump term, with the euro reaching the lowest among G10 currencies. EUR/USD may struggle further if the House remains divided.
• Pound Gains from Strong UK Data: The GBP/USD rate rose modestly due to better-than-expected UK PMI data, though gains were tempered by challenges in the UK services sector and pre-election caution among USD investors.

USD: Markets Favor a Trump Sweep, Boosting the Dollar

As US ballot counts progress, financial markets are seeing a strong shift toward “Trump trades.” With Georgia and North Carolina called for Trump, he currently leads in remaining swing states. The New York Times estimates his chance of victory above 95%, with Republican momentum also impacting the popular vote. This trend hints at a possible Republican “clean sweep” scenario, which could affect both the House and Senate, creating significant implications for the dollar and market sentiment. However, the House race remains tight, and a divided Congress could still impact risk sentiment and dollar strength.

So far, the FX market has responded as expected, with a broad dollar rally. Losses across G10 currencies range between 1.0–1.7%, except for the Canadian dollar, which saw a milder decline. This suggests optimism for the US economy, which could benefit Canadian exporters while reducing CAD’s exposure to trade tensions with China and other geopolitical factors under a new Trump term.

Treasury yields are rising, with bear steepening across the curve signaling market expectations for Trump’s inflationary fiscal and trade policies. Short-term USD swap rates reflect a hawkish shift, with markets expecting the Fed to cut rates by 25 basis points to 4.75% tomorrow, and a potential increase in the policy rate to 4.0% by June 2025, a significant jump from mid-September projections.

We’ll update our FX forecasts once major US networks call the election. However, if the anticipated Republican sweep solidifies, we could see the dollar continue to strengthen for an extended period.

EUR: Europe Faces a Trump Second Term with Caution

European leaders face potential turbulence this Wednesday as a likely Trump win looms with a strong popular backing. Trump’s anticipated trade policies could weigh on Europe’s open economy, especially if he broadens his trade agenda from China to other regions. This poses challenges for a eurozone already grappling with stagnant growth and economic uncertainty, particularly in Germany, where questions around its export-driven model are surfacing.

The euro has weakened more than any G10 currency, reflecting concerns over renewed trade conflicts. Should Republicans fail to secure the House, we believe EUR/USD would fare worse, lacking the supportive global growth a unified Republican government might deliver. In such a scenario, EUR/USD could approach parity by late 2025, prompting the European Central Bank to consider deeper rate cuts.

Near term, EUR/USD likely would have dropped further today if a Trump victory hadn’t already been priced in by October. Moving forward, EUR/USD appears to be heading toward 1.0550/0600, struggling to hold gains above 1.0800/0850.

With the UK’s relatively lower exposure to trade and recent fiscal support measures, EUR/GBP could test support around 0.8300, potentially moving toward 0.8200. Meanwhile, the Swedish krona depreciation aligns with G10 currency movements, supporting our view that the Riksbank might consider a 50-basis-point rate cut this week.

GBP: UK Data Gives Pound a Modest Lift

On Tuesday, the Pound-Dollar (GBP/USD) exchange rate gained after the release of the UK’s latest PMI report. As of writing, GBP/USD trades around $1.2985, up roughly 0.2% since the start of the day.

The Pound (GBP) saw gains across most currencies, supported by stronger-than-expected PMI data. While the final October index slipped from 52.4 to 52, it surpassed the forecast of 51.8, lending confidence to GBP.

However, challenges in the UK’s key services sector kept GBP’s gains modest. Meanwhile, the US Dollar (USD) retreated against most currencies as investors adopted a cautious stance amid pre-election uncertainty. As Americans head to the polls, market volatility rises, keeping USD investors in a holding pattern until after the election results are clear.