US election Clinton will win dollar and stocks will rise Right

Well, not quite. It is more complicated than that, but bear with me I will explain.

The US Presidential Election Day has finally arrived and soon we will know who will be leading the country for at least the next four years: Hillary Clinton or Donald Trump. The immediate focus will be on the exit polls, and ahead of that we are expecting to see some choppy price action across the financial markets. The potentially large moves will likely happen during the Asian session in the early hours of Wednesday as the outcome of the actual votes are announced from each US state. As mentioned previously, most analysts seem to agree with the markets that a victory for Hillary Clinton is good news for the dollar, stocks and risk assets in general and the opposite if Donald Trump wins – a finding that is consistent with our own twitter poll.

We asked on Twitter who will be the next US President and what will this mean for the dollar. After more than 370 votes, 49% of the respondents think Hillary Clinton will win the elections AND the dollar will close higher on Wednesday while only 12% think it will be lower if she does indeed become the next US president. Conversely, only 26% think that Trump will win AND the dollar will go up. For the sake of completeness, 13% think Trump will win but the dollar will close higher. 

#Elections2016: Who will be the next US President and what will be the dollar's response on a closing basis on Wednesday?

— FOREX.com (@FOREXcom) November 8, 2016

With almost everyone agreeing that stocks and/or the dollar will rise in the event of a Clinton victory, I just can’t help but feel that the opposite might actually happen after an initial knee-jerk reaction. Obviously if Trump scores a shock victory tonight then all bets are off. But assuming that Trump will lose, a Clinton victory is admittedly not entirely priced in, so we will probably see further noticeable gains for both stocks and the dollar in the early hours of Wednesday. But that does not mean stocks or the dollar will end Wednesday’s session higher. How do we know, for example, that it won’t be a classic case of “buy the rumour, sell the news” type of an event?

In any event, the potential gains could be short-lived, especially in the case of stocks. If you think about it, an appreciating dollar is surely bad news for US exports and company earnings, especially with the Fed also becoming more hawkish. With regards to the dollar, the markets are almost convinced of a December rate hike, with the CME Group’s FedWatch Tool suggesting about a 75% chance of a rate increase. A Clinton victory, if confirmed, would only increase those odds further. Thus, the dollar could also rise a little bit more in the short term on improved probability of tighter policy conditions in the US, especially against currencies where the central bank is still dovish. However, the higher the probability of a rate rise, the more it is priced in and the less the dollar could go higher, especially against currencies where the central bank is turning hawkish or less dovish.

GBP/USD could actually rally

This is where the GBP/USD comes in. After taking a beating for much of the year and most noticeably in the aftermath of the Brexit vote and more recently during the flash crash, the pound has found some buying interest towards the end of last month. This was chiefly in response to the Bank of England’s decision to abandon its dovish bias after admitting that inflation could overshoot the 2% target, due to the currency’s slump. Added to this, there is uncertainty with regards to the Brexit Article 50 after the High Court ruled that the government must seek parliament’s approval before triggering it. This could delay Britain’s exit from the EU or potentially even stop it. The whole situation is a total mess.

But with the BoE now neutral and UK data remaining surprisingly strong despite these uncertain times for the UK, the cable could stage a more meaningful comeback, though we are unlikely to see 1.40s or 1.50s any time soon. Recent price action suggests that a low has been made around the 1.20s. Thus, we may continue to see lots of price action within the 1.20-1.25 range going forward.

On this US Election Day, the GBP/USD has hit a low so far of 1.2355. Below here lies a key support area around 1.2320/30, which had been an important resistance zone in the past. We could see some sort of a bounce here. However If the cable fails to find support there then it could head much lower, with prior short-term support and resistance levels at 1.2280 and 1.2215 then becoming the immediate bearish targets.

The bulls meanwhile will want to see the breakdown of short-term resistance in the 1.2435-45 range. If seen, their next targets could be the 1.25 psychological level and beyond that would be the point of origin of the flash crash breakdown at 1.2600. A couple of other medium-term levels to watch include 1.2685 and then 1.2770. 

Source: eSignal and FOREX.com