US Dollar Volatility Tipped To Surge If Trump Wins Re-Election: Unicredit

Foreign exchange analysts at Unicredit have analysed the forthcoming US Presidential election which is set to be a rematch between Trump and Biden.

The bank’s main message is that volatility is liable to rise sharply if Trump wins in November.

Its current forecast is for the Pound to Dollar (GBP/USD) exchange rate to end 2024 at 1.28.

The bank considers that markets are under-estimating the risk of a spike in volatility if there is a Trump victory, especially as dollar volatility at present is very low in historic terms.

Unicredit considers that three Trump policies could underpin the dollar.

Notably, there is the risk of higher tariffs on US imports which would be likely to include Europe and weaken European currencies.

There would also be a more isolationist foreign policy and an escalation in geo-political risks, especially given the possibility of a withdrawal from NATO.

These policies would tend to undermine risk appetite which would support the US currency.

Unicredit also notes the potential for a more expansionary fiscal policy which would initially support the dollar, but pose medium-term risks as deficits widen further.

Although it considers the risk of Truss-style meltdown is low due the dollar’s reserve status, there would be downside risks to the US currency.

Key Quotes:

“If investors further postpone expectations for the start of the Fed’s rate cuts due to stronger-than-expected US CPI inflation, the USD is set to recover more ground across the board.”

“The DXY index will likely bounce back further above 104 and EUR-USD and GBP-USD will likely be dragged back towards 1.08 and 1.26, respectively.”

“If, on the other hand, US CPI inflation surprises on the weak side, a further appreciation back towards 1.09 for EUR-USD and back above 1.27 for GBP-USD could be at hand.”

“The additional fall of the US unit would probably help take some pressure off the JPY and the CNY, leading USD-JPY and USD-CNY to fall back below 151.50 and 7.23, respectively.”

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