The likelihood of a Republican clean sweep is significant. While it remains to be seen to what extent Trump will follow through on his economic policy promises or if this is a starting point for negotiations, we’ll have to wait and see.

Markets are positioning themselves for higher import tariffs and lower taxes, which could positively impact corporate profits, economic growth, and inflationary pressure in the U.S. This scenario means that, after a likely rate cut this week, the Fed will tread carefully with further rate reductions. However, markets are increasingly concerned about the sustainability of government finances, with the U.S. yield curve steepening significantly due to long-term rates rising faster than short-term rates. In other words, the term premium on long-term government securities is rising sharply.

In Europe, a potential Republican clean sweep is seen as negative for economic growth (due to higher U.S. import tariffs), which may give the ECB more room to lower rates. Yield curves in many European countries are steepening as well, but this is caused by 2-year yields falling faster than those on longer maturities. Lower oil prices and EUR/USD movements reinforce this picture, as energy import inflation is expected to decrease.

The rise in European stocks could be explained by expectations of a more accommodative ECB policy, a stronger dollar, and the hope that higher U.S. growth will offset the negative impact of increased tariffs.

Precious metals are declining, likely due to a stronger dollar and higher real interest rates, with investors seemingly anticipating that Bitcoin might become a more attractive safe haven under Trump than gold.

In the coming weeks, a sustained “Trump trade” (stronger dollar, rising stocks, and higher interest rates) is likely. However, several developments could limit EUR/USD's remaining downside potential:

• Further increases in U.S. long-term rates could make Congress hesitant to expand fiscal policy significantly.
• China may be prompted to stimulate its economy further, which would benefit Europe more than the U.S.
• A further decline in oil prices would support EUR/USD, as Europe is a major oil importer.
• A new term for Trump could encourage European countries to take additional measures to stimulate their own economies and foster closer cooperation within governments, especially in Germany and France.

Should a combination of these factors materialize, the decline in EUR/USD could be limited to 1.045. If not, and a Republican clean sweep occurs, parity or lower is likely.