US election: Impact on EUR/USD forecast and trading strategies

This guide will explore how the results, both actual and anticipated, of the US Presidential Election could impact the EUR/USD forecast and offer insights on how traders can leverage the election dynamics to enhance their trading strategies before, during, and after the November 5 vote.

 

• US election: 3 Scenarios that could influence EUR/USD forecast
  • Scenario 1: Trump clean sweep victory
  • Scenario 2: Trump wins but Democrats control Senate
  • Scenario 3: Harris wins Presidency
• How to trade EUR/USD before the US election
• How to trade EUR/USD during and after the US election
• EUR/USD technical analysis

 

Before discussing how to trade the EUR/USD ahead of, during and after the US election, and also taking a look at the chart of the popular trading pair, let’s first explore the three scenarios that could play out in the US election and how the EUR/USD might respond.

 

 

US election: 3 Scenarios that could influence EUR/USD forecast

 

Scenario 1: Trump clean sweep victory

 

Under this scenario, Donald Trump wins the election and Republicans win control in Congress. This is potentially the most bearish scenario for the EUR/USD forecast. Trump has promised tax cuts and immigration controls, which could be delivered as soon as possible. Tax cuts are both inflationary and supportive for the economic growth. Immigration controls means labour scarcity, which could lead to higher wages. Trump may also implement trade tariffs, including on Eurozone. Not only will tariffs be bad news for Eurozone exports (and therefore bad for the euro), but they can push up domestic inflationary pressures in the US as import costs rise for businesses. In short, inflation could be higher in a Republican clean sweep amid looser fiscal policy. Bond yields may increase and put upward pressure on US dollar. The impact of this scenario on the EUR/USD holds true for both the actual results and the expectations thereof, should opinion polls take a dramatic turn ahead of the voting day.

 

Scenario 2: Trump wins but Democrats control Senate

 

Let’s say that a split congress is comprised of Republicans-controlled House but Democrat-controlled Senate under Presidency of Donald Trump. In this scenario, Trump and the Republican’s hands will be tied. The Democrats will probably force Trump to make compromises on tax cuts and immigration, while trade tariffs may not be as forceful as they would under a Republican-controlled senate. Still, Tump’s foreign policy and planned tax cuts could stoke inflation fears, and this should be positive for the dollar, all else being equal. The EUR/USD may still decline by a couple of hundred pips if this outcome is not priced in by markets ahead of the election.

 

Scenario 3: Harris wins Presidency

 

In this scenario, Kamala Harris would win the Presidency, but Congress is split with the Democrats controlling the Senate, and Republicans the House. In fact, judging by opinions polls that were available at the time of writing this guide, in mid-September, Kamala Harris looked slightly favourite to win the Presidential Race. A clean sweep was not the base case, however, as Republicans were seen retaining their House majority in November. The US dollar was already in a bearish trend having fallen noticeably during August. Perhaps investors were pencilling in a Democratic win, although the fact the greenback was declining had more to do with falling inflation and rising unemployment rate, and the Fed’s indications of a forthcoming rate-cutting cycle. Still, a Kamala Harris win will mean less tax cuts and more rises from 2026. The fiscal restraint could hold back the economy, and potentially dampen inflation than would be the case under Trump. Meanwhile, a more certain trade backdrop should alleviate pressure on currencies where Trump had plans to introduce more tariffs on, including the euro. This outcome should therefore be positive for the EUR/USD and could keep the bullish trend that had started since April intact for the rest of the year, especially if the Fed continues to feel content with its battle against inflation.

 

How to trade EUR/USD before the US election

 

The impact of the US election outcome on the EUR/USD, the US dollar and more generally financial markets across the board will be determined by the extent to which the market is surprised. That is the most important point to remember. Financial markets tend to discount future events ahead of time. If the opinion polls are very close near the time of the November 5 election, implying uncertainty, then we should expect to see a sharp move in the EUR/USD as the results come out. However, if by the time of election, we see a clear lead for one of the presidential candidates then the market’s immediate response is likely to be more muted, unless those opinion polls turn out to be completely wrong! Refer to the below scenarios for greater detail in terms of what a clear lead or a win for one of the candidates may mean for the EUR/USD forecast.

 

With that said, the EUR/USD is likely to gravitate towards or away from the “Tump Trade” as opinion polls change, and we get closer to the time of election (obviously not ignoring the impact of all other – perhaps more important – macro events in the interim). For traders, this obviously doesn’t mean they can’t or shouldn’t trade the EUR/USD ahead of the election, regardless of where they think the pair is likely to head post-election. But perhaps aligning those trades in the direction of the opinion polls could yield even greater results as more macro influences are taken into account.

 

When this guide was written, around the middle of September, the US dollar was weakening. While this had a lot to do with the release of not-so-strong US data and the Fed’s strong indications that it was about to start front-loading rate cuts, the US election was also likely influencing the dollar’s outlook. Kamala Harris, seen as less favourable for the greenback, had gained traction in opinions polls after a live debate with Trump. If she continues to perform well, the dollar could remain weak, making it more reliant on economic data for support in the weeks ahead. A surprise surge in the polls for Trump, on the other hand, would likely be negative for the EUR/USD forecast.

 

How to trade EUR/USD during and after the US election  

 

Assuming a close race between the presidential candidates, once the results of the US election start coming out, traders may want to refer to the above scenarios in deciding which direction to potentially trade the EUR/USD as it starts to become clear which candidate has likely won the election. As always, risk management should never be forgotten. With the potential for heightened volatility on November 5/6th, traders may wish to reduce their position sizes to allow for a wider stop loss in order not to get prematurely wiped out of a trade because of market noise. It is also worth noting that chasing sharp moves can be extra risky. FX markets often tend to retrace and provide multiple chances to enter – if not exactly at your optimal entry point, at least at the next best level.

 

EUR/USD technical analysis

 

Source: TradingView.com

 

With the markets assumed to be efficient at pricing in macro events, the current trend on the EUR/USD’s chart is bullish. If you dare ignore everything else, the chart suggests that the markets are expecting Harris to win the election. The breakout from the multi-month triangle pattern is a bullish technical scenario, suggesting that a run to at least revisit the July high of 1.1275 could be on the cards, if not higher. Further upside major targets include the psychologically important 1.1500 handle, followed by 1.1750, marking the 78.6% Fibonacci retracement level against the 2021 high (1.2350). On the downside, 1.1000 is now the most important level to watch followed by the point of origin of the bullish breakout at 1.0900. If the EUR/USD were to break back below 1.0900, this would represent a major bearish scenario for the EUR/USD forecast ahead of the US Presidential Election.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R