Market Analysis: Trump 2.0 drives dollar and yields higher

As Trump 2.0 seems like a done deal markets have switched back on the “Trump trade” with the dollar and US yields moving sharply higher. The key idea behind this is that his second term in office will drive up inflation, causing the Federal Reserve to change the course of its monetary policy.

The US 10-year yield has risen 20 basis points throughout the Asian session as the results trickled in and started to point towards a possible Trump victory. This is the biggest daily gain in over two years. The bond market is going to be key over the coming days as it will give insight into how much bond traders are willing to push back on Trump’s suggested policies. If the Republicans are also confirmed to have taken victory in the House of Representatives – which is vital for tax policy – then we could see further volatility in bonds. His tax policies and tariff proposals are the key concern for bond markets, so we’ll have to see how much further pushback bond traders offer in the coming days. A key target for the US 10-year yield will be the 4.5% mark, followed by 5%.

Markets seem to have accepted that another Trump term would mean a supportive and expansionary fiscal policy, which could positively impact growth in the US. This is evident in the bullish reaction in equities, especially those largely influenced by the domestic economy. At the time of writing, the Russell 2000, S&P 500 and Nasdaq 100 are up 4.9%, 1.7% and 1.5% respectively. The path in the short term seem to remain higher but it is important to note that these indices are at – or close to – all-time highs, meaning we could see some technical selling not too far away.

With regards to Trump’s victory, stocks in sectors like energy, defence, financials, and manufacturing could be benefitted due to his pro-business policies, tax cuts, and deregulation. Trump's support for fossil fuel industries could benefit oil and gas stocks, as he would likely pursue policies that favour domestic energy production and potentially roll back regulations on emissions. Conversely, the renewables sector might face downward pressure if Trump prioritizes fossil fuels over green energy and scales back clean energy incentives or environmental regulations.

In the FX space, the revival of the Trump trade has pushed the dollar higher on Wednesday morning with the US dollar index (DXY) brushing the 105 mark before pulling back. Interestingly, Trump wants a weaker dollar as it will aid in his attempt to raise the US trade balance, but it seems like he is going to have a hard time achieving this. The fact his policies are seen as inflationary and may cause the Federal Reserve to reconsider its policy and delay cutting rates – more than other central banks – is likely to keep the dollar supported with regards to rate differentials with other currencies.

EUR/USD has been heavily hit by the dollar’s resurgence with the pair dropping through 1.09 and 1.08 before finding some respite at the 1.07 mark. The euro economy is seen as weaker which suggests more monetary easing from the ECB, weighing on the pairs ability to move higher. The outlook remains bleak for EUR/USD is the dollar continues to see upside pressure as the is likely little incentive to move higher from the euro side of the trade.

EUR/USD daily chart

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