The post-election rebound in equities and risk-associated FX has been welcomed by Deutsche Bank, who see the development as justified. With a Democratic Congress and President Trump’s willingness to cooperate, the likelihood of extreme policy outcomes has been reduced, compressing risk premia. Meanwhile, the fading Iran escalation risks have put additional downward pressure on oil, as the geopolitical premium decays.

However, the bank notes that there are hurdles ahead, including the US debt ceiling, which could become binding by Q2 2027, and lingering uncertainty around AI spending. Despite these challenges, Deutsche Bank remains optimistic about the recovery of the EUR/USD pair, citing the combination of lower energy risks, reduced policy uncertainty, and higher AI implementation risks as supportive factors.

On the other hand, a failure to resolve the debt ceiling this year would add further downside pressure on the dollar. In conclusion, while there are challenges ahead, the political relief and risk-on sentiment have driven a positive outlook for the global economy and financial markets.

Deutsche Bank’s analysis highlights the importance of political developments in shaping market sentiment and the potential for a more stable and supportive environment for risk assets. As the US government navigates the complexities of budget negotiations and AI spending, investors will continue to closely monitor these factors for signs of how the market may react.