Global markets are reacting strongly to President-elect Trump's threats of new tariffs on Mexico, Canada, and China, with emerging market currencies tumbling and the dollar strengthening. Cabinet nominations like Jamieson Greer as potential U.S. Trade Representative suggest a return to aggressive trade policies, while the Federal Reserve carefully weighs its next moves amid shifting economic conditions.
Fed Policy Outlook Faces Uncertainty Amid Trump’s Economic Agenda
President-elect Donald Trump's threats to raise tariffs on trade partners have rattled emerging markets, while his latest cabinet appointments continue to shape global sentiment.
In a social media post Monday evening, Trump warned that unless Mexico and Canada take stronger measures against illegal immigration and drug trafficking, he would impose a 25% tariff on imports from these countries and an additional 10% tariff on China.
On Tuesday, the Mexican peso plunged approximately 2.6% against the dollar, marking its steepest decline since August 2022. Meanwhile, the Canadian dollar dropped around 1.4%, reaching its lowest level in four years.
If Trump's previous term taught us anything, it's that a single social media post from him can send global markets into turmoil. Moreover, considering the tactics he employed during his first presidency, many interpret this latest post as the start of negotiations rather than the end. Trump's seriousness about tariffs is unmistakable, and it seems that the Trump 2.0 era has already begun, even before he officially takes over the White House.
Earlier this week, the nomination of Scott Bessent as the next Treasury Secretary sparked hopes for a more measured economic policy under the new U.S. administration. However, this sentiment reversed following reports that Trump plans to nominate Jamieson Greer as U.S. Trade Representative. Greer played a prominent role in trade policy decisions during Trump’s first term.
Greer’s selection reinforces the belief that tariffs will play a central role in Trump’s policy agenda. Greer’s prior remarks about using trade policy to pressure companies into reshoring their production operations to the U.S. further validate these expectations.
Trump's steadfast approach to tariff policies has prompted market observers to warn of increased volatility and uncertainty in the markets. In this scenario, emerging market currencies may remain under pressure, and the dollar could strengthen further.
Strategists at Deutsche Bank have stated that they expect the EUR/USD pair to decline toward parity by mid-2025. They also foresee the dollar potentially surpassing record levels not seen since the 1980s.
Similarly, JPMorgan strategists believe that the election's implications have not yet been fully priced in, and as traders continue to factor in the effects of Trump’s economic policies, they anticipate a similar rally in the dollar. According to JPMorgan, the EUR/USD pair could drop below parity in the first quarter of 2025.
The Bloomberg Dollar Index has risen by about 3% since the U.S. elections, continuing to strengthen to levels not seen since November 2022. This trend is supported by expectations surrounding the economic impact of Trump’s administration, as well as diminishing forecasts for Federal Reserve rate cuts.
Market participants are closely analyzing what Trump 2.0’s potential policies could mean for the Fed’s policy trajectory. A quarter-point cut is priced in with a 66.5% probability for the December 18 meeting, while the expected cuts for the end of next year are now less than three-quarters of a point.
Minutes from the Fed’s most recent meeting, released early Wednesday, revealed that officials broadly support a gradual and cautious easing of monetary policy. Additionally, they plan a "technical adjustment" to the rate offered on the overnight reverse repurchase facility, which could help bring money market rates below the lower end of the policy target range.
Earlier this month, Fed Chair Jerome Powell expressed no urgency to lower interest rates. While a handful of Fed policymakers emphasize the risks of inflation and maintain a cautious stance, others remain optimistic. In remarks made on Monday, Minneapolis Fed President Neel Kashkari stated that another rate cut in December would be appropriate.
Meanwhile, San Francisco Fed President Mary Daly emphasized the need to bring inflation down from its current levels, even though she does not wish to see a deterioration in the labor market. This duality adds uncertainty to the Fed’s policy outlook. However, critical inflation and growth data from the U.S., expected today, could provide more clues about the Fed’s next move.
According to a Bloomberg survey of economists, the median forecast suggests that the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, likely rose by 0.2% month-over-month and 2.3% year-over-year in October. The so-called core index, which excludes volatile food and energy costs, is expected to have increased by 0.3% monthly, pushing the annual rate to 2.8%—the highest since April.
If the report from the U.S. Bureau of Economic Analysis reveals an unexpected surge in price pressures, expectations for Fed rate cuts could be further dampened. This may trigger additional dollar strength and weigh on other currencies.
Gold Prices Fluctuate Amid Middle East Ceasefire and U.S. Inflation Concerns
Gold continues to recover its losses from earlier this week, driven by expectations of higher U.S. inflation under the Trump administration, despite reduced safe-haven demand following a ceasefire agreement in the Middle East.
Israel and Hezbollah reached a 60-day ceasefire agreement in the early hours of the day after weeks of negotiations mediated by the United States. While gold prices plunged earlier in the week as news of an impending agreement spread, the markets did not react significantly to the announcement itself, as this development had already been priced in.
On the other hand, geopolitical risks persist, as the agreement is temporary and does not signal the end of regional tensions. Israeli Prime Minister Benjamin Netanyahu stated that Israel can now focus on countering the Iranian threat and increasing pressure in its war against Hamas in the Gaza Strip.
Consequently, while the Israel-Hezbollah agreement has slightly reduced safe-haven demand, its impact on markets may remain limited unless meaningful steps toward peace in the region are taken.
Traders will closely monitor the data set to be released from the U.S. later today. Typically, an unexpected rise in U.S. inflation would drive up Treasury yields, increasing the opportunity cost of holding non-yielding precious metals. This generally translates to a decline in precious metal prices.
However, given heightened expectations for higher U.S. inflation in the near future, downward moves in gold may remain constrained as it serves as a primary hedge against inflation.
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