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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.