Synopsis:

TD expects 2025 to be a year of profound disruption in global markets, driven by political economy and geopolitics rather than traditional economic fundamentals. Trump's second term, in particular, is set to reshape global trade dynamics, posing headwinds for the EUR and complicating the USD's trajectory over the longer term.

Key Points:

• Geopolitics Take Center Stage:

  • TD emphasizes that the political economy and international affairs will play an increasingly pivotal role in FX markets, rivaling or surpassing central banks in importance.
  • The second Trump administration signals a move away from globalization and a focus on national sovereignty and democracy.

• Themes of De-globalization:

  • A global trend of voters prioritizing national interests over global collaboration reinforces headwinds for the EUR and signals a slower global growth environment with elevated inflation.
  • This shift echoes previous disruptive events such as Brexit, Trump's first term, and the European sovereign debt crisis.

• USD Outlook – A Tale of Two Halves:

  • Early 2025: Trump's initial policies, such as tariffs and fiscal stimulus, are likely to boost the USD in the short term.
  • Later in 2025 and Beyond: A potential grand bargain with China could reshape markets, leading to a weaker USD by H2 2025 and early 2026.
  • Trump's focus on reducing the US trade deficit could require a structurally weaker USD to support reindustrialization.

Conclusion:

2025 is poised to be a year of disruption, with global trade and political shifts dominating FX markets. While Trump's policies may initially lift the USD, the longer-term outlook is clouded by the potential for a weaker USD to align with the administration's economic objectives. TD advises market participants to prepare for a volatile and transformative year in FX markets.