nvestors are now increasingly viewing the prospect of a Donald Trump presidency as positive for both the US economy and the Dollar.

Financial markets have turned their attention to Trump’s economic policies following his election victory, namely his proposals to implement the largest tax cuts since Ronald Reagan and ramp up government spending, both of which could boost growth in the world’s largest economy next year.

The market has also subsequently come back round to the idea that higher interest rates are on the way in the US this year, having been almost completely discounted in the immediate aftermath of the election result. Federal Reserve member James Bullard dismissed the notion that the outcome of the election could derail the Fed’s plans to gradually increase interest rates. Bullard appeared unconcerned about the volatility surrounding the election, claiming that December was a ‘reasonable time’ to implement a rate increase.

We think there is now a strong argument to suggest that the Federal Reserve could even hike rates at a faster pace than initially planned, with increased spending and consumption next year providing upward pressure on both growth and inflation.

Meanwhile, Sterling was one of the few currencies to strengthen against the Dollar yesterday, rallying by close to one percent. Risks of an increase in anti-establishment movements, particularly across Europe, have heightened since the election and have temporarily shifted attention away from the political fallout of the Brexit vote in the UK.

Emerging market currencies instead bore the brunt of Dollar strength. The Brazilian Real suffered its largest daily loss since 2011, while the South African Rand and Mexican Peso slumped by more than 4% and 3% respectively.

Major currencies in detail:

GBP

Sterling defied yesterday’s broad rally in the Dollar, soaring 0.8% and nearing a one month high against the US currency.

News out of the UK was very light on Thursday, with all focus on the election fallout. Finance minister Philip Hammond looked to alleviate concerns of worsening trade agreements between the UK and US amid worries over the effect of Trump’s protectionist policies.

With no economic data in the UK today, the Pound will continue to be driven by political factors. Inflation data on Tuesday and the latest UK labour report on Wednesday will be the next major economic releases in the UK.

EUR

The single currency fell 0.5% against a broadly stronger US Dollar.

With economic data light in the Eurozone yesterday, attention was firmly on events elsewhere and comments from ECB member Constancio who struck a fairly optimistic tone, stating that the Eurozone recovery would continue. He claimed that the labour market would continue to improve, although core inflation remains a cause of concern.

German inflation this morning is not expected to rock the boat, with political factors dominating trading this week.

Trump’s election victory no doubt increases the risk of anti-establishment movements in Europe. We think this could present a significant risk to the Euro next year with crucial elections to take place in both Germany and France.

USD

The Dollar index rose for the second day yesterday, increasing 0.4%.

Expectations for the next interest rate hike by the Federal Reserve remerged as the main driver in the currency markets yesterday. In addition to comments from Bullard, Fed member John Williams also spoke yesterday, stating that the argument for gradual rate increases in the US ‘still makes sense post election’.

President elect Trump criticised the Fed during his campaign for delaying the process of raising rates. Once in office, Trump will also have to option to fill two vacancies on the FOMC’s seven member strong board and could opt for more hawkish successors to both Chair Janet Yellen and Vice Chairman Stanley Fischer when their terms ends in 2018.

Stanley Fischer will be the main focal point today when he speaks at an event at 14:00 UK time. We expect further signals that a rate increase in the US remains on track to take place next month.

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