After the election, the trading focus has shifted to the Federal Reserve's interest rate cuts

After the U.S. election, the market began to see profit-taking on the Trump trade yesterday:

Exchange: The U.S. dollar index fell from 105; USDCNH jumped to 7.21 after the midpoint rate (without the counter-cyclical factor) was announced yesterday, but market sentiment reversed during the day, falling back to 7.15 in the night session.

Bonds: The 10-year U.S. Treasury yield attempted to break through the 4.5% level but faced resistance, continuing to decline after the FOMC meeting, and is currently down to 4.34%.

Switching the Trading Focus: From the U.S. Election to Changes in the Federal Reserve's Rate Cut Path

The FOMC meeting in the early morning had little new content, with a 25bp rate cut as expected. Compared to the previous meeting on September 18, there are two main differences. I feel the overall tone is relatively hawkish, reflecting the impact of the recent two employment data releases and the Republican sweep (high probability) on the Federal Reserve's forward guidance.

1. Weaker Confidence in Inflation Decline: The statement "confidence in the inflation rate continuing to move towards 2% has strengthened" from the last meeting was removed.

2. Description of the Labor Market Conditions: Changed from "slowed" to "eased." My English level is limited, so I consulted Kimi this morning, and the answer is as follows:

How Will Trump's Presidency Affect the Federal Reserve's Subsequent Rate Cut Path? There are currently two different voices:

The first: Tariffs + immigration restrictions + fiscal expansion will push up inflation, making it more difficult for the Federal Reserve to cut rates and raising the long-term neutral rate. Currently, the Republican sweep of both houses is highly probable, and significant fiscal expansion in the U.S. will face no obstacles, which is also the main reason why the 10Y U.S. Treasury yield soared to 4.48% on Wednesday.

The second: Trump advocates for a weak dollar and low interest rate environment to promote the return of U.S. manufacturing, which may force the Federal Reserve to cut rates. After all, everyone still remembers that during his previous term, he criticized the Federal Reserve for not cutting rates quickly enough.

In this press conference, Powell's response was: In the short term, the U.S. election will not affect monetary policy.

From the pricing of interest rate futures, the current expectation aligns with the first scenario. After the election, the market's expectation for the Federal Reserve to cut rates in 2025 has decreased; currently, the market maintains a 70% probability of a 25bp rate cut in December this year, expecting only 2.7 rate cuts in 2025 (far below the September dot plot's prediction of a 100bp cut for 2025).

What is the current trading theme after the election?

From a trading perspective, buy the expectation and sell the fact. After the FOMC rate cut, non-US currencies have basically rebounded to pre-election levels. Today's market focus is on the domestic conference, and after the policy announcement at the conference, the market will eventually return to rationality, which may be the moment the shoe drops.

Personally, I believe that before the end of the year, there is no need to be overly pessimistic. The impact of tariffs has already been priced in, and in the short term, we will enter a tariff vacuum period. The RMB exchange rate will still experience seasonal settlement pressure under actual demand influence, so the 7.25 level is unlikely to break. Clients needing to settle can take advantage of this rebound to increase some hedging, which is reasonable. However, that said, there is currently no overly optimistic foundation. Next year, especially after the second quarter, we still need to pay attention to the impact of tariffs. For clients needing to purchase foreign exchange, if there is a pullback opportunity to 7.10 before the end of the year, it is recommended to directly lock in long-term forwards.

Author of this article: Fang Yuqi, Source: Good Morning Forex Market, Original title: "What is the current trading theme after the election?"