Impact of the US election on the FX market

Kamala Harris vs Donald Trump: a tight race

Currently, Democratic nominee Kamala Harris holds a narrow lead over Republican nominee Donald Trump, according to most betting markets and polls. Her controlled performance during the presidential debate on 10 September has contributed to this lead.

However, remembering how Trump outperformed predictions in 2016, the race is still considered too close to call. This uncertainty keeps markets on edge just weeks before the election.

How does the US election outcome impact the FX market?

In addition to the presidential election, 468 seats in the US Congress (33 of the 100 Senate seats and all 435 House seats) are up for election on 5 November 2024.

Currently, the House is under Republican control, while the Senate has a Democratic majority. This division is known as a 'divided government'. Since 1980, every US president has faced a divided government at some point, hampering their ability to implement preferred policies.

Unlike the sweeping victories of 2020 (Blue Democratic Sweep) and 2016 (Red Republican Sweep), a divided government is likely in 2024. Despite this, the US President holds significant authority over trade policy, differentiating it from other areas like taxation and fiscal policy. This makes trade policy a key channel through which the 2024 election could impact foreign exchange (FX) markets.

Republican victory

Trump has signalled he would raise tariffs on Chinese imports to 60% or higher if re-elected. Such a move could negatively impact growth expectations outside the US and might prompt foreign officials to respond in kind or devalue their currencies to offset these tariffs' economic impact. Additionally, the US could face higher inflation, leading to increased interest rates.

A Republican sweep of both houses of Congress (a Red Sweep) could also lead to considerable fiscal expansion, characterised by higher spending, lower taxes, and rising debt. This scenario would likely strengthen the US dollar due to heightened expectations for US economic growth and higher interest rates.

Democratic victory

A Democratic victory, whether partial or full, would likely mean a continuation of policies from the Biden administration, which have been tied to mild US dollar weakness.

Harris is expected to pursue less fiscal expansion than Trump, resulting in less growth. Additionally, inflation is projected to decrease, leading to lower real interest rates, which are generally negative for the currency.

A contested election

After Biden's victory in the 2020 presidential election, then-President Donald Trump sought to overturn the results, alleging electoral fraud, rigged voting machines, and other issues. This dispute led to the Capitol attack on 6 January 2021, by his supporters.

If similar events occur in the 2024 election, the presidential declaration process could be significantly delayed beyond election night. This uncertainty would likely cause elevated volatility in FX markets.

Initially, traders might flock to safe havens like the Japanese yen and Swiss franc and away from risk-sensitive currencies such as the Australian dollar and New Zealand dollar.

EUR/USD technical analysis

Ahead of the US election, the EUR/USD is eyeing multi-year trend channel resistance at 1.1290, as viewed on the monthly chart. This level stems from the July 2008 high of 1.6038 and is reinforced by the July 2023 high of 1.1275.

A sustained break above 1.1275/1.1300, particularly following a Democratic win, could open the way for the EUR/USD to extend gains towards 1.1850.

Conversely, if EUR/USD fails to break resistance at 1.1275/1.1300, likely under a Republican victory scenario, it could fall through interim support at 1.1000 and head back towards medium-term support at 1.0500.

EUR/USD monthly chart

AUD/USD technical analysis

Ahead of the US election, the AUD/USD is at 18-month highs, testing multi-year downtrend resistance at 0.6900, as seen on the monthly chart. This level traces back to the 1.1081 high from July 2011.

If the AUD/USD can break above 0.6900, a Democratic win in early November could help extend gains towards 0.7000 and then 0.7150 by year-end.

Conversely, a Republican victory would likely see the AUD/USD give back recent gains and return to its 200-day moving average, currently at 0.6620.

AUD/USD monthly chart

• _{Source: TradingView. The figures stated are as of 25 September 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}