Synopsis:

BofA anticipates that FX markets will refocus on economic data in the coming weeks, as the immediate political impact from the US election subsides. While a second Trump term adds policy uncertainty, near-term USD strength appears restrained by mixed technical signals and market caution. Investors may await specific policy details in January, with long-term USD impacts contingent on the Fed's response and global reactions to US policy.

Key Points:

1. Shift Back to Data: Market attention is likely to return to data-driven trading, especially after last week's weak NFP print and better Eurozone data supporting the EUR.

2. Short-Term USD Constraints: BofA suggests a tempered USD outlook in the near term, citing mixed DXY signals, low realized volatility, and muted risk reversals. USD bulls are encouraged to adopt a medium-term focus.

3. Uncertain Long-Term USD Impact: Post-inauguration, the USD's trajectory will depend on Trump’s policy specifics, the Fed’s inflation response, and potential global reactions, including from the EU. BofA anticipates an FX impact more complex and less linear than during Trump’s first term.

4. Global Response and EU Reforms: The alignment of US policies with Trump’s campaign promises could provoke international responses, particularly EU reforms that, though gradual, may provide EUR support amid growing geopolitical concerns.

Conclusion:

BofA foresees restrained USD momentum in the near term as markets digest election outcomes and shift focus to data. However, the USD’s medium-term path depends on the specifics of Trump’s policies, Fed reactions, and global responses. This nuanced outlook suggests a cautious FX approach, with a complex USD trajectory shaped by evolving US policy and international dynamics.