Trump’s surprise victory boosted the US Dollar across the board but Sterling managed to strengthen versus the ‘Greenback’ following the election.
US Election Shocks Markets
At the start of the week markets rallied on hopes of a status quo Hillary Clinton victory after she was cleared by the FBI of criminal wrongdoing related to her use of private email servers while serving as Secretary of State.
However, when the election results came in and it became clear that Donald Trump had become the 45th President of the United States, investors reacted differently to expectations. Rather than sell the ‘Greenback’ on the economic uncertainty of Trump’s rogue policies, traders opted to buy into the US Dollar in anticipation of higher inflation and therefore higher US interest rates.
The belief is that Trump’s protectionist policies will drive inflation higher in the US and subsequently prompt the Federal Reserve to hike interest rates faster than previously estimated. This mindset has benefitted the US Dollar. However, some analysts note that this rose-tinted vision – and the relatively low risk premium – suggests that markets are not accurately pricing in the prospect of Trump’s proposed debt-fuelled stimulus programme leading to instability in the long run. Indeed, Trump’s campaign pledge to slash taxes and invest in infrastructure could see US debt rise from 80% to 105% (as a percentage of GDP) over the next 10 years.
‘Cable’ Hits 5-Week High
The Pound to US Dollar exchange rate reached a five-week high by the end of the week as traders hoped that Trump’s support for ‘Brexit’ and outspoken desire to retain the ‘special relationship’ between the UK and the US would allow for a beneficial post-‘Brexit’ trade deal between the two nations.
Week Ahead
It’s difficult to predict how GBP/USD will trade this week. Having struck multi-week highs last week the Pound has dropped back slightly at the start of this week’s session.
British data prints regarding inflation, employment and retail sales are expected to come in positively, which should give Sterling a little boost. However, the ‘Greenback’ could easily appreciate if Federal Reserve policymakers maintain a hawkish policy outlook in planned speeches this week.
With the US Dollar rallying against almost all other currencies on expectations of tighter monetary policy, it may be difficult for the Pound to post further gains.