Deutsche Bank believes that the US dollar has not yet strengthened beyond fair value, and the S&P 500 index, which is sensitive to tariff policies, continues to consolidate. The market's implied pricing of the ECB's neutral interest rate has not significantly declined either, indicating that the market's pricing of Trump's victory is still limited
Due to the rising probability of Trump's victory, the "Trump trade" seems to be making a comeback.
However, on Friday, Deutsche Bank's Chief Foreign Exchange Strategist George Saravelos pointed out that "although there has been a significant change in market sentiment, pricing should be cautious."
According to Saravelos, pricing Trump can be defined as pricing based on the scenario of "aggressive tariff policies + large-scale domestic fiscal stimulus." Fully pricing in a Trump victory manifests in the foreign exchange market as a risk premium of the dollar exceeding interest rate differentials, that is, the dollar strengthening beyond fair value.
Taking the EUR/USD as an example, Saravelos believes that without any drivers from data and events, the continuous decline of the EUR/USD since last week can only be attributed to the change in the election situation, namely the increasing probability of Trump's victory.
However, the trends of the dollar and the interest rate differentials between the US and Europe are basically the same at the moment. Historical data shows that during Trump's term in 2018, the dollar exchange rate was about 10% higher than the US-Europe interest rate differential.
In terms of the stock market, there is also no strong evidence to prove that the market is massively shifting towards the "Trump trade." The S&P 500 index, sensitive to tariff policies, continues to consolidate, and even shows a downward trend.
Regarding central bank interest rates, Saravelos expects that if aggressive tariff policies are implemented, the market's implied pricing of the neutral interest rate of the ECB may be at 1% or below, otherwise it may be at 2% or above, and if there is a high level of uncertainty, it may be around 1.5%, while the current market pricing is between 1.7% and 1.8%.
Therefore, Saravelos concludes that the market has begun to price in the possibility of Trump's victory, but the overall impact on the market is still limited.