A second Trump term may strengthen the USD and weaken the EUR, especially with a Republican Congress. Proposed tariffs, supply chain restrictions, and potential tax cuts would drive dollar gains and boost U.S. inflation, while pressuring EUR/USD toward parity by 2025. This scenario could force the ECB to cut rates to support eurozone growth.

EUR: Under pressures

The "Trump Trade" remains a key driver for markets, with the "Republican Sweep" adding downside risks to the EUR. A combination of fiscal stimulus and trade tariffs could bolster U.S. growth and inflation, prompting the Fed to adopt a less dovish stance, thereby strengthening the USD. In contrast, the ECB is likely to continue supporting the struggling Eurozone economy by cutting policy rates further, which would weigh on the EUR.

Meanwhile, dovish expectations for the ECB have intensified as Germany's ZEW Current Situation Index dropped to pandemic-era lows (-91.5), with expectations also falling short at 7.4 versus the 13.2 consensus. Uncertainty surrounding U.S.-EU trade relations following the U.S. election results may have dampened business confidence. Additionally, the collapse of Germany's coalition government has likely added to these challenges. A majority of ECB members have expressed support for another rate cut in December, as disinflation in the Eurozone is seen progressing along the desired path.

Looking ahead, markets will closely monitor October CPI and preliminary PMI data. Any significant surprises could further reinforce the strategy of selling the EUR on rallies.

USD: ‘Trump Trades’ and hawkish Powell

In the near term, "Trump Trades" are expected to continue drive market sentiment and support the USD, especially with Republicans now in control of the White House, Senate, and House of Representatives. This "Republican Sweep" is likely to result in moderate fiscal expansion, increased tariffs (primarily targeting China), and reduced net immigration. These policy shifts could support higher growth and inflation in the U.S., potentially prompting a more hawkish reevaluation of the Fed's rate-cutting cycle.

On the policy front, October’s U.S. CPI meeting expectations keeps the Fed on course for a 25 basis point rate cut in December. However, a gradual pace of easing remains likely, with potential pauses as we head into 2025, influenced by Trump’s policies. Fed Chair Powell's recent remarks also leaned hawkish. He stated that current economic indicators do not suggest urgency to lower rates and that economic resilience allows the Fed to make careful decisions. Powell noted that policy adjustments will aim toward neutral over time, though the path may not be smooth, and reiterated his expectation for inflation to gradually approach the 2% target. Commenting on the latest PPI report, Powell acknowledged a minor upward bump but maintained that inflation is on a stable track. He added that current policy positioning allows for rate cuts if needed, yet with a cautious approach.

Overall, the "Trump Trade," Powell's hawkish stance, and the resilient U.S. economy are likely to provide support for the USD in the near term. However, much of the positive impact from the "Trump Trade" has already been priced in, leading to potential near-term profit-taking. Despite this, the overall outlook for the USD remains strong. Looking ahead, market attention will shift to preliminary PMI data; any significant downside surprise could offer buy-the-dip opportunities as U.S. politics will continue to be a key driver for the USD, adding further volatility and influencing short-term trends.