The Trump Trade is beginning to become the Donald Downfall. What’s next?

Here is the Bank Of America Merrill Lynch view, courtesy of eFXnews:

Markets are gradually getting concerned that the pre-election Trump and the postelection Trump may be the same person. One by one, President Trump seems to be carrying out his pre-election promises, some of which may not necessarily be seen as market-friendly. As a result, the gradual USD sell-off has continued this week, while US equities saw a correction from an all times high and volatility has spiked from historic lows. How far (and how literally) President Trump will go to some of his most controversial pre-election promises remain to be seen.

However, a number of forces may benefit the USD, fuelling a new rally in the next few months. We would expect a diminishing market impact from Trump headlines and tweets that are not directly market-relevant. Investors may also learn to differentiate empty from actual threats. President Trump has promised tax reform and a massive fiscal stimulus, all USD positive, promises that we would expect him to deliver, most likely as a package with the Congress approval of the debt ceiling. Paul Ryan’s plan includes a smaller fiscal stimulus, but still large, particularly for an economy already in full employment. The details of the Trump fiscal policies are also bullish for the USD, such as a new Homeland Investment Act and a Border Adjustment Tax.

As long as the US data remains strong and inflation on a rising trend, the Fed will hike at a pace closer to what the Dot Plot suggests. Indeed, we believe that we will soon shift from trading Trump headlines to trading the US data and US fiscal policy headlines.