The election of Trump increases the likelihood of policy-induced inflation, which forces the Fed to maintain its restrictive stance for a longer period of time.
A 25 basis point cut is anticipated when the FOMC meets on Thursday.
The US economy is still expanding at or above the trend.
Following former US President Donald Trump’s acquisition of the electoral votes required to become the new US president, the US Dollar Index (DXY), which compares the value of the USD to a basket of six currencies, jumped to a four-month high.
After a sharp increase against the majority of its major peers, the US Dollar Index trades above 105.00 on Wednesday, the highest level since early July. Expectations of Trump’s initiatives, such as tax cuts, deficit spending, and tariffs, have increased since his victory. These measures are expected to increase inflation and prevent the Federal Reserve (Fed) from adopting a more dovish monetary policy.
As the US dollar, UST rates, and US equities futures increased overnight, bolstered by the so-called “Trump Trade,” markets had been expecting the win.
This means the Fed will have to maintain its restrictive policies for a longer period of time because there will likely be greater inflation under a Trump presidency than otherwise.
A Republican president, a Republican Senate, and a Democratic House have historically benefited the US dollar the most.
The anticipated 25 basis point cut should conclude the two-day FOMC meeting, which starts on Wednesday.
The US economy is expanding rapidly, and the labor market is still doing well, despite skewed employment numbers.
As we enter Q4, the October ISM services PMI was excellent, indicating strong consumption.
The positive technical indicators propelled the DXY index to multi-month highs. The Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) are getting close to overbought area, which could indicate a short-term drop. Wednesday’s noteworthy price movement points to consolidation before to another higher movement.
104.50, 104.30, and 104.00 are important support levels, whereas 105.50 and 106.00 are resistance levels.
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