What impact will President Trump have on the Exchange Rates?

Donald Trump is the new President-elect of the United States who will govern alongside a Republican majority in congress. The news came as something of a shock to foreign exchange markets which had been pricing an Hillary Clinton victory. The uncertainty triggered a massive sell-off in global stock markets, commodities, the Dollar and commodity Dollars in what looked to be a repeat of the reaction to June’s Brexit vote.

“While it is hard to see the US election result as a positive outcome for the UK, we see no reason to alter our still above consensus forecasts that the UK economy will expand by about 1.5% next year and 2.5% in 2018,” said Capital Economics’.

The EUR/USD now looking at possibly testing November lows in the 1.0850s as the rapid turnaround gifts the Dollar some positive momentum that we would expect to extend. The Euro is a major funder of US stock markets and when markets are up Euros are typically transacted into Dollars to meet global investor demand. “The usual negative correlation of the Euro with US equities is one reason for an EUR/USD rally on the back of a Trump victory near-term. In the medium-run, the effect is ambiguous,” said Deutsche Bank’s Marco Stringa.

One major plus for the Eurozone in the future could be Trump’s fiscal stimulus agenda, which seeks to increase government spending by 2-3%, and which, it has been argued, could result in much-increased demand for Eurozone imports. However, Deutsche Bank do not see this as likely, given the Republican-controlled Senate and House will almost certainly block any executive attempts to increase government spending. In addition, even if such a stimulus package were to get implemented, it would have only a marginal impact because the plusses would be offset by a shrinking  pool of resources, such as labour, for example, because of increased  immigration control.