The US election is the largest political event that currency markets have to navigate. With the 2020 election falling in the middle of a global pandemic and the ensuing economic issues, it is probably the most important vote since 2008 when the world tried to recover from the Global Financial Crisis.
While sterling has been the barometer for Brexit risks, the US dollar will provide the same indicator the three scenarios that could possibly play out in the early hours of Wednesday morning when the election results are known.
The three scenarios are a ‘blue wave’; Joe Biden and the Democrats winning the White House, Senate and the House of Representatives, ‘Gridlock’; Biden winning the White House, Democrats winning the House and the Republicans retaining the Senate, and ‘Status Quo’ with Trump holding on to White House, Republicans retaining the Senate and Democrats only winning the House.
Currently, market expectations are that, in the short term at least, a ‘blue wave’ would be negative for the US dollar and positive for the pound as investors believe a Democratic majority will provide the opportunity for a larger stimulus package to add rocket boosters to the US economy as it tries to recover from the Covid-19 recession.
In the longer term, we cannot write off US dollar strength. More spending should eventually lead to inflation, and interest rate rises by the Federal Reserve as the US economy drives a global recovery should also see the currency strengthen. However, we may have to wait a while for these factors to become reality and, as with all things Covid-related, the timeline on a vaccination will help or hinder this recovery markedly.
The ‘blue wave’ is what most pollsters and analysts are pointing towards currently, but polls are often wrong and it’s the magnitude of their falseness that makes for surprises.
If the ‘gridlock’ scenario plays out, , we foresee the opposite scenario in currency markets with the US dollar strengthening and the pound falling.
Any stimulus plans that policymakers want to enact have to be passed by both House and Senate, and with a lack of consensus between the two chambers of Congress, any plan will be smaller and less focused than in the ‘blue wave’ scenario.
Compromises also mean delays, and while this would hurt US in the short term economically, investors would likely buy the US dollar on the basis of its attraction as a haven from these issues.
If Donald Trump retains his status as the President of the United States, then the US dollar will likely strengthen, with the pound going the opposite way as investors speculate on four more years of confrontational politics. Stimulus discussions will continue to drag with a Republican Senate likely to instead push for tax cuts, something that may increase corporate investment into the US.
Don’t forget about Brexit
While ostensibly an issue between the UK and European Union, Brexit is also an issue in the US elections with both Republicans and Democrats showing solidarity with Ireland on trade and the Good Friday Agreement. Factoring those positions into discussions on a UK and US trade deal will be crucial for the pound in the long term.
Regardless of the outcome of the 2020 US election, businesses must remember the one thing about elections that many forget; they are the beginning of a whole new regime.
Article from Jeremy Thomson-Cook, Chief Economist at Equals Money