Throughout the volatility seen after the Presidential election in November, the run-up to Donald Trump’s inauguration and the turbulent first few weeks of his Presidency, investors have remained focused on one thing; fiscal stimulus.
The billionaire Republican repeatedly promised on the campaign trail that he would deliver strong fiscal stimulus measures and infrastructure investment. Estimates varied, but some postulated his plans would amount to around US$1 trillion in additional spending.
The prospect of increased fiscal stimulus excited investors, as extra money being pumped into the economy would be to boost wages and employment. With more consumers, spending more money, inflation would likely rocket.
This would see the Federal Reserve, already expected to continue hiking interest rates this year, up the pace of their policy normalisation to prevent the economy from overheating.
But with the political furore Trump has created with some of his executive orders and the way he has interacted with foreign leaders, is it becoming harder for traders to see the silver lining to the divisive President?
USD long-term forecasts depend upon whether or not Trump actually delivers on his campaign pledges.
Will Trump Focus on Immigration and Trade Distract from Spending Promises?
Trump has already given strong indications that he will make good on numerous campaign pledges. Unfortunately for investors, these pledges have been the ones most economists agree are likely to harm, rather than aid, the US economy.
Trump has already set the wheels in motion for the construction of a wall along the Mexican border – although his claim that the Mexican government will pay for it has been strongly disputed by numerous sources; most notably the Mexican government itself.
The President has also begun the process of withdrawing the US from the Trans-Pacific Partnership (TPP) and signalled that he will begin renegotiating the North America Free Trade Agreement (NAFTA) soon. Numerous comments from the President and his officials suggest that a trade war with China is becoming increasingly likely.
Although the approval of two controversial oil pipelines former President Barack Obama had refused to back was seen by markets to be a sign of Trump’s pro-business leanings, this has been the only real sign of any of his fiscal policies.
Indeed, Goldman Sachs has grown worried that the market’s positive reaction to Trump may be overdone. Analysts recently commented that;
‘Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration. One month into the year, the balance of risks is somewhat less positive in our view.’
Can USD Bullishness on Trump Stimulus Hopes Continue?
Markets have remained largely focussed on the potential for Trump’s Presidency so far, moving little in response to the controversies surrounding the Republican’s more sweeping policy changes.
Notably, the huge political backlash against Trump’s ‘Muslim ban’, which prevents citizens or refugees from Iraq, Iran, Yemen, Libya, Syria, Sudan and Somalia entering the United States, has moved markets little.
But economists have long-warned that tighter immigration controls could harm the domestic economy. As the focus of the impact moves from social to economic, investors are beginning to wake up to the possibility Trump may be damaging the US economy, not strengthening it.
A combination of nearly 100 of the biggest corporations on the planet, including Apple, Microsoft, Facebook, Intel and Google are planning to sue the President over the ban, claiming that it could cause ‘significant harm’ to American businesses.
These issues are starting to cause markets to fear that fiscal stimulus is low down on Trump’s list of priorities, with the President’s initial executive orders have focussed on withdrawing from trade deals and banning US funding for women’s health groups across the globe that discuss or educate on abortion.
Traders will need to see some evidence soon that the President intends to carry out his spending plans. Considering his business background, Trump may choose to quickly implement the sweeping tax reforms he discussed on the campaign trail. These would include drastically reducing the number of tax brackets, as well as lowering taxes for citizens and corporations.
But should ramping up government spending seem to remain little more than a promise, the US Dollar may have trouble holding on to its recent gains for long, as the current administration is likely to create more controversy and undermine market confidence.
Interbank USD Exchange Rates
At the time of writing, the USD GBP exchange rate was trending around 0.79, the USD EUR exchange rate was trending around 0.93 and the USD AUD exchange rate trending around 1.30.
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