Friday Forex Follies : Trump 2.0

The Fed’s rate cut has sent the dollar into a mini tailspin, signalling that the “Trump Trade” might be losing some of its momentum in the rates markets. Despite Chair Powell dropping a few hawkish hints, the market largely brushed it off. Powell kept his cards close to his chest, sidestepping any election-linked chatter, leaving traders to speculate on how Trump 2.0 will play out in real terms.

We’re shifting from a phase of speculative pricing on campaign hype to a wait-and-see period as the market looks for concrete details on Trump’s policies. Investors will want to see specific timelines and clarity on Trump’s agenda in the coming months before committing to any long-term rate projections. For those feeling déjà vu as analysts dust off the Trump 1.0 playbook, a word of caution: don’t get too comfortable. Campaign promises are just that—promises—and Trump’s second term could deliver some unexpected twists.

As we approach the December FOMC meeting, we’ll get an actionable bird's eye view of the Fed’s economic outlook and its view on Trump’s potential impact. ( I think you want to pre-trade this) Our take? Trump’s policies—particularly those on tax cuts—could fuel a short-term growth boost, but the trade angle remains a wild card. Will he soften his approach on tariffs or double down? It’s anyone’s guess, and even a milder stance may struggle to pull 10-year Treasuries below the 3.75% mark—unless the economy throws an unexpected curveball.

While growth optimism is high, there’s still an undercurrent of caution. Tax cuts may lift markets, but the real test lies with trade policy. The game plan is to keep an eye on the data and avoid getting swept up in premature bets until we start seeing Trump’s agenda materialize. Yes, we stay long dollars, but selectively so.

Let’s break it down: post-election, EUR/USD is primed for a downward slide on the heels of a Republican clean sweep—a scenario we were gearing up for pre-election as the easier way to trade the volatility. With Trump back in action and a red sweep setting the stage, expect an initial green light for tax cuts and a heavy dose of protectionism. And here’s the kicker: such a stance could very likely provoke a dovish reaction from the ECB, tilting the balance toward 1.0 parity.

Now, I’m not telling you to lock in your “parity party” tickets just yet, but the trajectory over the next few months looks increasingly bearish for the euro if Trump sticks firmly to his America First playbook.

So, why isn’t the dollar rocking and rolling? Let’s break it down. First off, despite that last-minute swing from a heavily biased Des Moines Register poll that momentarily threw traders for a loop, the “Trump Trade” has been priced in since early October. Markets have been tuned into this outcome via betting signals from platforms like Polymarket, so a pause to catch our breath here isn’t surprising.

Let's move on to the more significant factor: USDCNH hasn’t gone ballistic. There’s still a lot of optimism about China’s next moves, with expectations building that Beijing might drop a massive fiscal stimulus package. Post-election, this could be a targeted effort to offset a potentially weaker export outlook by ramping up domestic demand. Yet, the jury’s out. If China disappoints, we’re looking at a potential setback here.

Remember our playbook? It’s a binary outlook: China either fires up the fiscal “bazooka” to stabilize growth or devalues the yuan to blunt the impact of trade tensions. It seems they’re leaning toward the first option for now, but the true reveal is still on the horizon.

Finally, Trump’s victory speech struck a surprisingly conciliatory tone. It avoided divisive language and made no mention of tariffs. But a big hat tip to Elon, the “rising star.”

Whether you’re a fan of Elon Musk or not, there’s no denying that he’s taken risks most people wouldn’t dare. He’s put his reputation, and quite possibly his fortune, on the line repeatedly. Musk is, without question, one of the most remarkable entrepreneurs the world has ever seen. From Tesla to SpaceX, he’s consistently pushed boundaries, tackling colossal challenges with a vision few can match. Love him or not, his impact on the White House could be undeniable.