The single currency has been one of the losers from Trump’s victory, losing 2% on Wednesday to 1.07, its lowest since July. And it’s not just a story of a strong dollar, with the euro also losing around 0.7% against the Swiss franc and 0.8% against the pound.

The single currency’s weakness has been attributed to fears of trade wars, which made life noticeably more difficult for Europe during Trump’s last presidency. Then, as now, it could be a double whammy: immediate tariffs on European goods and increased pressure on China, reducing demand in the Middle Kingdom and squeezing German exports there.

While the short-term market reaction may seem overly impulsive, this could be far from the final leg down. EURUSD fell 15% from the start of 2018 to the lows of 2020. The euro’s weakness then kept pace with the decline in German industrial production. Production has fallen since the beginning of last year, even without a trade war with the US, but opening a new front could accelerate the process.

The outlook for the EURUSD is much the same. The pair approached 1.20 in late September but has pulled back to 1.07, testing the range support of the past 12 months.

Technically, the EURUSD’s failure to break below 1.0770 confirmed the market’s strong bearish bias following last week’s corrective pullback. According to Fibonacci’s theory, the pair has downside potential in the 1.05 area, which is near the 161.8% level of the monthly decline from the September peak.

However, even earlier, in the 1.0600-1.0670 area, the euro could find strong support and retreat to the year’s lows.

From a fundamental point of view, pressure on the single currency is increasing due to fears of a further narrowing of the trade surplus and the need for the ECB to stimulate the economy more actively.

At the same time, it is too early to talk about the dollar breaking parity with the euro. Only a sustained decline below 1.05 will open the way to 0.95 or even 0.85. But we have seen how tenaciously this level has been defended over the past 10 years, and it was only broken for a few months in 2022 amid a series of shocks ranging from lockdowns and logistical problems to energy prices and supply issues.

Trump wins a second term

Former President Trump has won the 2024 presidential election, achieving a noticeable comeback following the 2020 defeat. The market reaction has been mostly within expectations, with the dollar gaining across the board, gold suffering and bitcoin enjoying strong gains.

While market participants are gradually turning their focus to the Fed meeting for any hints on the rate outlook after Thursday’s gathering, it is worth examining the performance of key market assets from election day until year-end in election years since 2000.

Euro/dollar could drop further towards year-end

Chart 1 below depicts euro/dollar’s past performance. This pair finished the year in positive territory in every post-election period examined since 2000, with one exception. In 2016, euro/dollar sold off aggressively, finishing the year around 4.5% lower compared to the election date, as Trump’s pro-America agenda boosted the dollar.

S&P 500 historical performance is mixed

As seen in chart 2 below, the performance of the S&P 500 index after election day has been mixed. However, focusing on 2016, the world’s largest stock index finished the election year around 4.5% higher, partly supported by the customary Santa Rally.

Russell 2000 index could benefit the most

Trump’s “America first” agenda is expected to benefit small- and medium-sized US-based corporates. In 2016, this positive sentiment persisted in the post-election day period, with the index finishing the year around 13% higher compared to the election day close. In this context, the Russell 2000 index, which encapsulated small-cap stocks, is expected to perform well today.

Gold could suffer further into year-end

Similarly to the S&P 500 index, gold’s performance after election day since 2000 has been mixed, with the precious metal rallying significantly in 2008 but suffering in 2016. Since Trump was first elected in 2016, a possible repeat of that performance could mean that gold could drop towards the $2,500 area.

Stocks’ volatility could ease while euro/dollar volatility could rise further

The pre-US election day period is traditionally characterized by increased market volatility. Based on historical analysis, the VIX index tends to drop aggressively after election day, with 2008 being the exception as the 2007-2008 financial crisis was unfolding. In 2016, VIX dropped aggressively, ending the year around 25% lower compared to election day.

On the flip side, as seen in Chart 5 below, euro/dollar volatility has historically eased in the post-election day period. The only time that volatility remained high and experienced a strong rally was in 2016, when Trump was first elected.

Putting everything together, the performance by key market assets after the 2016 election could serve as a guide to what the future might hold. We could indeed see euro/dollar drop, US stocks rally and gold suffer, but past performance does not guarantee future results. Particularly in a period with two active conflicts, in Ukraine and the Middle East, and China struggling to fix its housing sector issues.

Global Takeaways of the U.S. Election

Deglobalization and fragmentation are likely to gather momentum in a Trump 2.0 administration.

In our view, Trump winning the White House and having a largely unilateral ability to implement tariffs and shift U.S. trade policy in a more protectionist direction is yet another deglobalization force. During his first administration and over the course of his latest campaign, Trump has been unwavering in his commitment to tariffs. Time will tell how tariff policy ultimately evolves, but as our U.S. economists note in a post-election report, Trump’s tariff threats should be taken seriously. Global trade cohesion has suffered since the Global Financial Crisis and deteriorated further as a result of COVID. Erecting new barriers to trade will place additional pressure on the interconnectedness of the global economy, which can have longer-term negative implications for global economic growth, especially if retaliatory tariffs are imposed on the United States.

Fragmentation (i.e. countries choosing to strategically align with either the U.S. or China) is a product of deglobalization, and as U.S. trade and broader economic policy becomes more uncertain, strategic alignments could shift back toward China. We observed a noticeable shift in alignment patterns toward China during Trump’s first term, driven by countries opting for stronger trade relations with China, participating in China’s foreign investment programs and voting in unison with China on geopolitical issues at the United Nations General Assembly. With U.S. trade policy likely to turn more contentious and inward-looking, countries around the world could look to strengthen economic and geopolitical ties with China.

Trump will not be able to manufacture dollar depreciation

In our October International Economic Outlook, we noted how a Trump White House would lead us to become more positive on the U.S. dollar. Now that Trump has indeed won the election, we reinforce our view for a strong dollar over the course of 2025 and into 2026, and will become more positive on the dollar outlook in our next forecast update. As far as the dynamics surrounding a more constructive dollar view, in their post-election report, our U.S. economics colleagues noted the extension and possible expansion of the expiring provision of the Tax Cuts and Jobs Act (TCJA) in addition to the likelihood of higher tariffs.

Over the next few years, tariffs and looser fiscal policy could lead to higher U.S. inflation, and through reduced purchasing power of U.S. consumers and businesses, could also contribute to slower U.S. growth. With the Federal Reserve potentially cautious about the overall inflationary implications of the new administration’s policies, the U.S. central bank may lower interest rates more gradually than we currently expect. While there may also be some influence on foreign central bank monetary policy, we think the impact would be far more limited. Slower U.S. growth and tariffs would likely spillover to foreign economies, placing both growth and interest rate differentials in favor of the U.S. dollar over the longer-term. Sporadic bouts of markets volatility could also provide the dollar with safe haven tail-winds over the next 18 months. Also, despite any rhetoric aimed at weakening the dollar, Trump will be unable to influence the long-term direction of the dollar. In our view, Trump’s preference for a weaker dollar would have to be accommodated by and in coordination with the Federal Reserve, which we view as unlikely. We view the Fed as a monetary authority that is unlikely to pursue a weaker dollar at the direction of the President nor have its independence questioned by global financial markets.

Source: Euronews