Trump takes back control

The news that Donald Trump will be the 47^th president of the US, the Republican party has gained control of the Senate and may maintain its grip on the House of Representatives has seen a rally in the dollar against sterling, the euro and the yen, as well as a surge in US bond yields.

The move reflects expectations that Trump’s policies, including cutting taxes, hiking tariffs on trade and possibly even diluting the independence of the US Federal Reserve, will drive up inflation, keep interest rates higher for longer and also dent global growth.

So where do we go from here?

Markets will process the results over the coming months, as we learn what Trump’s policies are likely to be.

The promise to reduce corporate taxes is supporting equity markets and we also note that the new administration looks set to renew the tax cuts from his first presidency that are currently set to expire at the end of 2025. This includes lowering individual tax brackets and allowing for larger deductions, which will boost the spending power of the US consumer.

One critical area will be tariffs where he has threatened increases of between 10%-20% across the board, 60% on Chinese goods and surcharges of up to 100% on Mexican imports until it curbs immigration through the US’s southern border.

Clearly if the US follows through on this and America’s trading partners retaliate, a material increase in global inflation would follow which would negatively impact global growth. The International Monetary Fund (IMF) said that higher tariffs on a “sizeable swath” of world trade by the middle of 2025 could cut 0.8% from global output in 2025 and 1.3% in 2026.

At this very early stage we cannot say with any confidence how far tariffs will rise – to a certain extent Trump’s threats are probably bargaining chips to extract trade concessions from other countries. However, the direction of travel is clear.

With prospects of less monetary easing and a sizeable fiscal boost adding to US demand, also for foreign goods and services, we see a stronger US dollar as justified in the near term. For the end of 2024, we would suggest we could see GBPUSD at 1.27.

The picture is less clear for the end of 2025. A more hawkish Fed and strong GDP growth could drive the US dollar higher still, as could geopolitical risks. But conversely, markets might hit the point when fears of fiscal profligacy start to dominate – and concerns could be heightened further if Fed independence is truly in doubt. For now, we are minded to factor in some weakening in the dollar, leaving GBPUSD at 1.30 or so.

One question mark is whether Trump’s second presidential term will involve any dilution of the independence of the Fed. His pre-election speeches included a plan to give the president input on the US central bank’s interest rate policy. At this point we are not minded to change our forecast for tomorrow’s Federal Open Market Committee (FOMC) announcement and continue to expect a 25 basis point (bp) reduction in US interest rates. The committee is likely to conclude that it is too early to determine what the exact changes to policy will be under a new administration and that it remains appropriate, for now, to bring interest rates down towards neutral.

We are also not changing our forecast of a further 25 bp cut next month, but we are less confident about the outlook for a continued decline in rates through the course of next year. For now, we would suggest two more 25 bp cuts and then a pause as a plausible base case.

In short, we are at an extremely early stage to be drawing definitive conclusions on exactly what a new presidency means for the US and global economies until we allow our thoughts to crystallise.

This article is for general information purposes only and should not be used or relied upon as professional advice. It is advisable to contact a professional advisor if you need financial advice.