Overnight the US Dollar (USD) slumped sharply across the board in response to a shock victory for Republican candidate Donald Trump, with both the Euro (EUR) and Pound (GBP) making solid gains against the weakened ‘Greenback’.
- USD exchange rates experienced volatility on US election surprise – Markets shaken by unexpected Donald Trump victory
- Euro boosted by US Dollar weakness – Odds of 2016 Fed rate hike dropped dramatically
- USD GBP exchange rate trended lower despite ongoing Brexit worries – Investor focus shifted to uncertain US outlook
- Pound forecast to find support on narrowed trade deficit – Confidence in UK economy could be boosted by stronger showing
Although the panic of markets has eased after the initial surprise, the US Dollar looks set to see further volatility over the coming days as uncertainty dominates.
It is also expected that this outcome will deter the US Federal Reserve from raising interest rates in December – as had previously been forecast. If that proves to be the case, the US Dollar is liable to come under significant pressure and the US Dollar to Pound (USD GBP) and US Dollar to Euro (GBP EUR) exchange rates may gain.
Although there are several data releases for the UK, Eurozone and US scheduled for publication today, their impact will be limited as all eyes remain firmly fixated on Donald Trump. If Trump maintains the more moderate and conciliatory tone struck in his acceptance speech the market confidence could continue to recover, something which could see USD exchange rates return to a stronger footing.
US Dollar Exchange Rates Slumped in Response to Donald Trump Victory
Investors experienced a major shock overnight after Donald Trump was elected as the 45th President of the United States. This ran counter to the expectations of a Hillary Clinton victory that had built up at the start of the week, prompting the US Dollar (USD) to slump sharply as the election began to swing in Trump’s favour. Markets were naturally unsettled by the result, given Trump’s protectionist and hard-line rhetoric, with investors selling out of the ‘Greenback’ in favour of other safe-haven assets.
Some of the initial turbulence of USD exchange rates calmed in the wake of Trump’s acceptance speech, which proved to be rather less inflammatory than had been anticipated. Even so, the outlook of the US Dollar will remain volatile in the near future, as markets await some greater clarity on the reality of what a Donald Trump presidency will look like. As researchers at Westpac noted:
‘A number of Trump policies such as building a wall between the US and Mexico; labelling China as a currency manipulator; and deporting immigrants have the capacity to inflame foreign relations broadly, potentially resulting in repeated waves of financial market uncertainty and being to the lasting detriment of the real economic activity as potential growth is curtailed.’
Lower Odds of 2016 Fed Interest Rate Hike Weighed on USD EUR Exchange Rate
The US Dollar Euro (USD EUR) exchange rate plunged as the results of the election increasingly pointed towards a Republican sweep. Although the single currency is not a traditional safe-haven currency it benefitted strongly from its negative correlation with the US Dollar. Confidence in the Euro was encouraged by the now diminished prospect of the Federal Reserve raising interest rates before the end of the year, something that will limit its policy divergence with the European Central Bank (ECB) in the near term.
However, if the initial panic of investors continues to ease over the coming days then the Euro may struggle to hold onto its gains against the US Dollar. Speculation continues to favour the ECB extending its quantitative easing program at its December meeting, a prospect that is likely to increasingly drag on the single currency. If markets are quick to adjust to the reality of the Trump victory then the USD EUR exchange rate has the potential to regain its losses this week.
USD GBP Exchange Rate Forecast to Remain Under Pressure on Improved UK Trade Balance
Despite Brexit-based anxiety having strengthened once again in response to the announcement of the date for the Supreme Court to hear the appeal over the Article 50 case, the US Dollar Pound (USD GBP) exchange rate jumped during Tuesday’s American session. With the ‘Greenback’ weakening against many of the majors the Pound was able to make some fresh gains, although the initial slump of the USD GBP pairing soon began to moderate.
While market focus is set to remain primarily on developments in the US there is potential for Sterling to find an additional rallying point. Forecasts point towards the UK visible trade deficit having narrowed from -12.1 billion to -11.3 billion in September, an improvement which would be a positive signal for the domestic economy. However, if the trade gap is found to have worsened then the USD GBP exchange rate could be encouraged to trend higher.
Current Interbank Exchange Rates
At the time of writing, the US Dollar Euro (USD EUR) exchange rate was slumped in the region of 0.89, while the US Dollar Pound (USD GBP) pairing was trending lower at 0.80.