EUR/USD at yearly lows as “red sweep” extends the Trump trade effect

Just as analysts were thinking that the Trump trade was running out of steam, it was confirmed on Wednesday that Republicans will control both chambers of Congress: The House of Representatives and the Senate.

With control over both chambers, Trump will find his policies much easier to pass. The two big winners from Trump’s victory, the USD and Bitcoin, both soared as the news hit the markets.

The EUR/USD is hovering just above the 1.05 mark, a low not seen since October 2023. Bitcoin, on the other hand, set another record high above 93,000 USD before retreating. The USD Index (DXY) is closing in on multi-year highs above 107.

Meanwhile, gold continues to suffer at the hands of the bullish dollar, trading close to the 2550 USD mark.

The question remains: At what point does the Trump trade train run out of steam? US CPI figures released yesterday showed that inflation remained sticky at 2.6%, though this met market expectations. According to CME FedWatch, the chances of a further .25% rate cut by the Fed on 18th December are now above 80%.

But, with inflation still higher than target, policymakers sounded cautious about further rate cuts past December.

In prepared remarks, St Louis Fed President Alberto Musalem said, “recent information suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen.” Dallas Fed President Lorie Logan struck a similar tone, saying that it’s “best to proceed with caution… if we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction.”

With Trump trade euphoria still controlling the markets and policymakers wary of cutting rates too fast, it may be some time before we see sustained weakness in the USD.

That said, technical indicators show that EUR/USD is now entering oversold territory, though whether this is enough to give the dollar bulls pause remains to be seen.