The US Dollar as Elections Approach
Over the last 1 – 2 weeks the US Dollar has witnessed a lack of direction with both bullish and bearish trends. Assets at times can experience a trendless period as the market awaits major economic and political events. The US elections are unique as it will affect each citizen and the economy for the years to come and should not be compared to other high volatility events such as monetary policy releases and NFP Friday.
The question traders are now asking themselves is how the US Dollar is likely to react over the next coming days. This is something which we cannot predetermine, but we can analyse the price movement at this specific moment. The blog will look at different elements which are currently surrounding the US elections and more importantly the tradable asset itself.
The US Dollar and Past Elections
There is a great deal of uncertainty surrounding the price movement of the US Dollar as the days move closer to the race for the White House. History suggests that the greenback will rise once the result has been declared, regardless of who wins. In fact, after nine of the last 10 elections since 1980, the dollar has strengthened in the first 100 days of the new or returned administration.
The US Dollar has historically risen on average by 4% after Democrats have prevailed, whereas it is 2% when a Republican candidate wins. However, traders should note the market is unpredictable and volatile and the US Dollar may continue to decline as it has been over the last 5 months.
Financial Stimulus Packages
Over the past week, President Trump has been playing his games and giving mixed messages on negotiations to extend the stimulus package in order to help businesses and households. The lack of an agreement has a massive strain on the asset, but if an agreement is reached it could strengthen the dollar. The negotiations have generated uncertainty for the medium and long-term future of the American economy.
According to the New York Times, the States are “nearing a dangerous tipping point”. Federal Reserve chair Jerome Powell has said that if there is no agreement, or a lack of economic support it, “would lead to a weak recovery, creating unnecessary hardship. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth”.
Should the government fail to extend stimulus soon, negotiations would likely not start again until 2021 according to reports. By then, more temporarily unemployed could turn into more permanent job losses and more companies could start laying off more employees, making the recovery harder to bounce back from.
Currently the US Dollar is decreasing in value as there is a lack of progress with regard to negotiations and as the Elections arise. It is important to continue to analyse the price movements and trends within the currency pairs. Alongside the analysis of trends, the market will without doubt continue to keep an eye on the coming elections and how the US Dollar reacts accordingly.