EUR/USD, GBP/USD and the US election: what’s the outlook for the US dollar?

The US election promises to be a turbulent period for the dollar, with ramifications that extend far beyond the 3 November polling date. There are several scenarios that could result from the election, with some having the potential to boost the dollar and others putting pressure on the greenback.

The weak dollar scenarios

1. A Biden win and a Democrat ‘blue wave’: if Joe Biden succeeds in taking the White House and the Democrats succeed in taking control of the Senate, given them full control over Capitol Hill, then the chances of a large and far-reaching stimulus programme are greatly increased. This would tend to see a weakening of the US dollar, both on increased fiscal spending and a risk-on move across FX markets as investors hope that the stimulus programme will lead to a stronger and more effective US recovery. In turn this will help lead other countries out of recovery, prompting further moves out of the dollar towards other currencies.
   In such a scenario, EUR/USD and GBP/USD could see some substantial upside over the longer-term, while the dollar itself suffers.
2. A Trump win: given the way the polls are going, a US President Donald Trump win still seems very unlikely. But it cannot be discounted entirely. If the incumbent president succeeds in winning a second term, then it would also mean that the Republicans will hold on to control of the US Senate too. Like a ‘Blue Wave’, this will increase the chance of a new stimulus programme, only this time with the Republicans in charge. Senate leader Mitch McConnell has shown reluctance to push forward with a deal before the election, given the high chance of a Republican loss, but if Trump pulls off a surprise win then the Senate Republicans will be happy to back the president once more.
   Here again, a big Republican stimulus programme would be taken in a positive light by markets, giving the potential for a rally in EUR/USD and GBP/USD.

The strong dollar scenarios

1. A Biden presidency, but with a Republican Senate: while Joe Biden does lead in the polls, it is not certain that the Democrats will also take the Senate. Such an incomplete victory raises the prospect of paralysis, or at least political trench warfare, after the election, as a Biden White House and Democrat-controlled House of Representatives battle a Republican Senate to push through a stimulus bill. This political deadlock could see any package watered down in effect and/or reduced in size.
   As a result, the dollar would likely gain on safe-haven flows, as investors fretted about the potential for a weaker US, and hence global, recovery. This would in turn push down EUR/USD and GBP/USD, as investors revise their outlook for growth in these economies too.
2. A contested election: the outcome everyone fears, a scenario in which neither side emerges as the clear winner and legal challenges are launched could put severe pressure on risk assets. While it would not be a good outcome for the US nation or economy, the dollar would likely see safe-haven flows in a similar manner to the above scenario, but in more dramatic fashion.
   In this outcome, we can expect additional downside for EUR/USD and GBP/USD, but in perhaps more severe fashion as markets price in both political deadlock in the US and perhaps no chance of a stimulus deal in the next six months until the deadlock is resolved.

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