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The USD and the American Elections – Scenarios


Posted: Thursday, October 1st, 2020

Estimated Reading Time: 2 minutes

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Scheduled on November 3rd, the U.S. elections have a strong impact on the USD already. Despite the fact that the dollar did not react dramatically during the first presidential debate, things will likely change.

Americans will cast a vote not only for the next President but also for the two chambers of Congress – the Senate and the House. A divided Congress has a tough time passing through vital legislation in terms of fiscal spending, for instance. But a united one suggests full speed ahead for either the Democrat or Republican projects.

Therefore, the November elections are not only about the President but also about Congress. Hence, about the USD.

USD

Because the USD is the world’s reserve currency, it affects the entire financial world. Currency traders have a particular interest in who wins the two chambers, as the U.S. will gyrate dramatically on any outcome.

Ranges already dominate the price action. The EURUSD moves in a three-hundred pips range since July, the GBPUSD holds close to 1.30, while the USDCHF trades water too. In the days before the elections, here are a few scenarios to consider for the USD courtesy to Pictet Wealth Management.

A Trump Win and a Republican Congress Boosts the USD

The lowest probability belongs to a red victory – Republicans take all. In this case, the dollar gains as global uncertainty remains elevated. Whenever uncertainty reigns, investors seek shelter in the USD’s safe-haven characteristic.

A Biden Victory and Democrats Take the Congress

Such a scenario means the opposite for the dollar. In the medium and long term, the greenback should decline as investors will favor risk assets. Large infrastructure programs coupled with fiscal stimulus should further cement the dollar’s decline.

Strong USD for a Trump Win and a Divided Congress

The easiest way to interpret this scenario is by looking at what happens these days with the second fiscal stimulus in the United States. To reach a consensus on any major theme takes time and only brings uncertainty.

Biden Wins the White House and a Divided Congress

A Democrat President will likely improve foreign relations, and that may reduce the uncertainty. Rated with the biggest probability so far into the race, this scenario is likely to cause a decline in the USD in time.

However, before jumping to the conclusion, remember what the market participants predicted that stocks would collapse should Trump won in 2016. It won, and stocks did not collapse but did just the opposite.

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