Donald Trump will be inaugurated as the 47th President of the United States on Monday, January 20. However, his policy is already appearing in the markets today. The markets mainly perceive pro-inflationary risks associated with continued fiscal expansion and customs policy.
There has been a lot of speculation surrounding tariffs in recent weeks. World agencies cite anonymous sources close to the Trump administration. Some mentioned the possibility of sectoral tariffs, while others mentioned flat tariffs increased month by month. We may learn more on Monday, January 20. The customs policy options are different. Universal and blanket tariffs introduced to increase budget revenues, tariffs targeting specific areas (sectors and countries) of international trade and tariffs that could replace sanctions as a tool to protect national security. The greatest risk of a pro-inflationary impact comes from flat tariffs. However, if it were a one-time effect, without side effects and with a temporary duration, the conduct of monetary policy would not have to change fundamentally. Here, an expert evaluation of the central bank will be needed, including the use of models simulating the potential impacts of specific measures. As was the case with the first wave of tariffs in 2018 during Trump's first term as president. At the end of 2018, the Fed's prognostic apparatus focused on simulating the introduction of a 10% tariff on all imports, i.e. on consumer goods and capital goods, and on a duty imposed only on capital goods. The result of the simulation showed that, compared to the forecast at the time, flat tariffs have an impact on higher inflation, which, however, is temporary and will gradually fade away until it declines. Duties on manufactured goods, on the other hand, had an immediate effect on the lower outlook for price growth over the entire monitored period.
Market in connection with Trump's the policy is betting on a stronger dollar. If Trump delivers nothing during the inauguration to support that sentiment, some of the market could bet on a stronger dollar, which would weaken the dollar. In order for the greenback to further strengthen, on the other hand, Trump would have to deliver more than we know today, i.e. more than the market is currently valuing. Speculative bets on the growth of the euro against the dollar reached negative values as a share of the total volume of open positions, according to CFTC data. The market is thus betting on the strengthening of the American currency against the European one, but in historical comparison, these are rather moderate values.
Short term volatility will probably be increased on Monday, from a longer perspective we will be mainly interested in the effects on the outlook for American rates. He is currently betting on a drop in Fed interest rates by around 38 points compared to 50 points from the December forecast. Overall, we are still dealing with the risks of a stronger US currency, especially during the first half of the year. We should feel it especially with the pair of koruna against the dollar. The koruna could be a bit more resilient against the euro. But if Trump were to announce the introduction of tariffs on Europe, we would see a sell-off even in this most traded koruna pair. Our prediction of maintaining the exchange rate above 25.00 per euro and above 24.00 per dollar continues. The biggest risk for market sentiment remains the outbreak of a trade war. Source: Bloomberg, Reuters, WSJ, X, Fed Disclaimer: This article is only informative and does not serve as an investment recommendation according to Act no. 256/2004 Coll. about doing business on the capital market. In preparing this article, the author relied on publicly available sources. Neither Roklen Holding as nor Roklen360 as are responsible for any errors in the text or data.