Key FX advice for 2025 is not to overthink US Dollar (USD) strength and to trust the general direction of a stronger USD on the back of Trump’s domestic and trade agenda. This week’s price action has given us a taste of what’s to come in FX markets in this second Trump term, with brief dollar corrections taken as an opportunity to enter structural USD longs at more attractive levels, ING’s FX analyst Francesco Pesole notes.
Jerome Powell to speak in Dallas
“The House has finally – and unsurprisingly – been called for the Republicans, confirming Trump will be able to control all levers of government at least until the mid-term elections in 2026. Meanwhile, cabinet appointments have so far been dominated by Trump’s loyalists, which is a shift from the first term that likely implies a more centralised decision-making process around the president’s figure. One minor potential setback for Trump was John Thune’s election as Republican Senate leader.”
“Despite our view that the dollar will stay strong throughout next year, the very short-term picture still looks a bit more nuanced as long dollar positioning is starting to look quite stretched and a wider (albeit not long-lived) dollar correction could be on the cards. One catalyst might be today’s PPI numbers, which have a greater relevance for the core CPE – the Fed’s preferred measure of inflation. Expectations are for a re-acceleration in headline PPI from 0.0% to 0.2% MoM, with the core measure flat at 0.2% MoM.”
“Another big event today is the speech by Fed Chair Jerome Powell in Dallas. The focus will be on the economic outlook, and there is a Q&A where he may be asked about the latest inflation figures and implications of protectionism for monetary policy. Also here, the risks are skewed to the downside for the dollar given stretched positioning, as Powell may want to shy away from linking Trump’s expected policies and the Fed’s decisions. That could be read as a slightly dovish message and prompt some repricing lower in a USD OIS curve that is quite conservatively only pricing in 50bp of easing by mid-2025. A positioning-led correction in USD may fail to take DXY back below 106.0, and interest in buying the dollar dips will likely emerge soon.”
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