It is far too early to predict the longer term currency impact of a Trump election victory in the US and, after an initial flurry of nerves, the markets seem to have settled (the Mexican Peso aside), certainly more so than after the UK Brexit vote.
In the short term, we may see some more US$ weakness as markets move assets to safe havens such as gold, Japanese Yen and Swiss Franc and react cautiously as they usually do in times of uncertainty.
Trump’s purported plans to deport millions of unregistered migrants in the first 18 months of his term could negatively affect US GDP yet, conversely, planned tax cuts and protectionist proposals could be a positive in the medium term.
Furthermore, the Federal Reserve Bank recently signalled that an increase in short-term interest rates is in prospect as soon as the next FOMC meeting in December due to a pick-up in inflation. This has been made further likely by the sharp rise in market inflation expectations since the election result as investors anticipate a new era of tax cuts and government spending in the US.
The short term, the relative weakness in the US$ after the election should prove an opportunity for those looking to buy US$ for £ and, at the time of writing, sterling is moving higher to levels above 1.2650 not seen since early October.
It is possible that GBP/USD has some short-term potential to move towards 1.30, but levels above 1.2650 may be a $ buying opportunity in the short term. The medium term outlook is unclear and there is a risk of further US$ advances after markets calm down and the Fed hikes interest rates.
Longer term prospects for US$/GBP and will depend largely on how Trump acts once in office and also further market perceptions of the UK and Brexit.
With £ also gaining against the Euro, the future path of the Euro over the short term will depend heavily on re-evaluated expectations for the next policy moves by both the ECB and Federal Reserve following the election. However it is likely that Euro monetary policy will remain accommodating even if the Fed hikes rates.
Once again, Sterling’s fate remains tied to Brexit perceptions and it is likely to remain volatile with downside risk against the Euro in the medium term. Any level above 1.1650 should be a good level to buy Euros in the short term.
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This article was written on the 14th of November, 2016.