11/11/2024
Policy Shifts, Political Uncertainty, and Dollar Strength
The EUR/USD pair has been under pressure, trading near its lowest levels since June at around 1.0700, as the US Dollar (USD) strengthens amid shifting economic and political developments. Following the recent US presidential election victory of Donald Trump, the USD’s long-term outlook has improved, supported by expectations of inflationary pressure due to Trump’s proposed policies, such as increased import tariffs and significant tax cuts. These policies are anticipated to raise the US national debt by an estimated $7.5 trillion over the next decade, potentially adding to inflation and limiting the Federal Reserve’s flexibility for further rate cuts.
On the monetary policy front, the Federal Reserve recently reduced its policy rate by 25 basis points to a target range of 4.5%-4.75%, citing balanced risks to employment and inflation. Fed Chairman Jerome Powell refrained from signaling any further rate cuts, maintaining that monetary policy decisions remain unaffected by the presidential election outcome. Currently, markets are pricing in a roughly 65-70% probability of an additional 25 basis point cut at the Fed’s December meeting, which would lower rates to 4.25%-4.50%. In the meantime, the release of US Consumer Price Index (CPI) data on Thursday is unlikely to shift rate expectations significantly unless it deviates markedly from forecasts, as Fed officials continue to express confidence in the trend towards their 2% inflation target.
In Europe, the Euro is experiencing additional downward pressure due to expectations that the European Central Bank (ECB) might adopt a more aggressive stance on rate cuts compared to the Fed. Markets anticipate the ECB will reduce its key rate by 25 basis points in December, with further cuts likely by mid-2024, bringing the rate down to around 2%. Additionally, political uncertainty in Germany, where Chancellor Olaf Scholz may move up the confidence vote in parliament, could further weigh on the Euro if early elections are triggered.
Investors will continue to monitor remarks from Federal Reserve officials this week for any new insights into December’s monetary policy direction, while US inflation data and ongoing developments in Europe add further context to the unfolding international financial landscape.
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The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.
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