How the US Election for President Affects the World’s Currency Markets

Every quadrennial, the United States prepares for its presidential elections, with the entire globe eagerly awaiting the outcome. Traders and investors worldwide carefully observe campaign trails, proposed policies, and public polls, not only out of political curiosity but to gather insights into how the elections and the eventual winner might impact the global financial markets.

Whoever emerges victorious in the race for the United States presidency has the potential to significantly alter the global economic landscape, thereby creating new avenues for traders to explore. In this article, we will explore the impact of US presidential elections on the forex market.

The outcome of presidential elections has a significant impact on US foreign policy decisions, which in turn can have wide-ranging consequences for global economic relations, trade agreements, and geopolitical stability. These various elements collectively have a significant impact on determining the strength and fluctuations of major currencies, such as the US dollar.

For forex traders, it is crucial to remain informed about current events during election years. In the past, the period leading up to the US elections has resulted in significant fluctuations in currency pairs, including EUR/USD, GBP/USD, and USD/JPY.

The Influence of the Presidential Elections in the United States on the History of Currency Pairings

Although past data cannot provide an absolute guarantee of future market behavior, similar circumstances will likely result in comparable price fluctuations. It is crucial to understand that a wide range of factors influences the fluctuations in currency pairs’ prices, and the US presidential elections are among the significant contributors.

Let’s examine the price fluctuations of EUR/USD and USD/JPY during November 2016 and 2020, which were significant months due to the US presidential elections.

EUR/USD in 2016

This duo frequently responds to changes in US-EU dynamics. Historically, trade policies that have favored protectionism or alterations in NATO funding have been known to result in periods of instability. The candidate who is expected to win and their policies have caused fluctuations in this pair as traders have speculated on the future of US-EU economic relations, influenced by public opinion.

Now, let’s examine the fluctuations in the price of EUR/USD during November 2016, a significant period marked by Donald Trump’s victory with 304 votes, surpassing Hillary Clinton’s 227 votes. The value of EUR/USD dropped significantly, falling from 1.1292 to 1.0515, indicating a substantial 7.4% decline.

After Trump emerged victorious in the election against Clinton, the Euro experienced an immediate decline while the US dollar gained strength. This can be attributed to a multitude of factors influenced by the outcome of the election, including:

• The Eurozone’s political landscape became even more uncertain following Trump’s triumph. Anticipated, this lack of clarity was predicted to hinder the expansion of the Eurozone and add complexity to the tasks of the European Central Bank (ECB), ultimately weakening the Euro.
• The fiscal stimulus plan put forth by Trump aimed to boost the economy through increased government spending and substantial tax cuts, including a reduction in corporate tax rates. This was anticipated to have a significant impact on the competitiveness of American businesses.
• Trump’s commitment to imposing tariffs on imports was expected to decrease the amount of imports into the US, bolstering the strength of the US dollar. Furthermore, any decrease in immigration may affect the amount of money sent overseas as remittances.
• After Trump’s win, analysts predicted that the Federal Reserve would adopt a more cautious approach and increase interest rates in December 2016.

EUR/USD in 2020

Joseph Biden Jr. emerged victorious in the quadrennial presidential election held in November 2020. The emergence of Biden in the 2020 US presidential election was perceived as a favorable development for emerging markets, resulting in a depreciation of the US dollar against these currencies. The market’s response was impacted by anticipations of normalized trade policies, enhanced global growth prospects, and uncertainties surrounding future fiscal policies in the US.

Over five weeks, the value of EUR/USD experienced a 4.87% increase, climbing from 1.1602 to 1.2167. Various factors contributed to this reaction:

• The newfound clarity that accompanied Biden’s victory has significantly boosted global market sentiment. There were great hopes for the stabilization of US foreign policy and trade relations, which would alleviate tensions and enhance the global economy. During this period, Wall Street experienced a robust performance, achieving its most impressive week since early April at that time. The presidency of Biden was expected to bring about a notable change from the approach of the Trump administration, particularly in the realms of foreign policy and trade relations. The markets responded favorably to the possibility of a reduction in trade tensions, especially with China.
• The expectation of diminished trade tensions during the Biden administration prompted a surge in capital inflows into emerging markets. The MSCI Emerging Markets Index (EEM), for example, ended the day at its highest level in more than two years.
• Biden’s victory has heightened hopes for fiscal stimulus, which was approved to bolster the US economy’s rebound.

USD/JPY in 2016

In November 2016, the USD/JPY experienced a significant increase, surging from 101.75 to 118.691. This remarkable jump of 17.31% occurred within a single month. This substantial increase could be credited to various factors, although experts highlight that Donald Trump’s triumph played a crucial role. Here are a few factors that contributed to the anticipated strengthening of the USD after Trump’s victory:

• During the 2016 debates, Trump’s proposed policies were seen as having the potential to stimulate economic growth, increase inflation, and possibly result in more assertive interest rate increases by the Federal Reserve.
• Trump’s pledges to invest heavily in infrastructure, reduce taxes, and loosen regulations created anticipation of a faster economic expansion and increased inflation in the United States.
• In November 2016, the Federal Reserve was already moving towards a more restrictive monetary policy, while the Bank of Japan continued to implement an extremely loose monetary policy in order to address deflationary pressures.
• The Japanese yen is frequently desired as a secure asset during periods of market unpredictability and upheaval. At first, there was a sense of uncertainty following Trump’s victory. However, as markets started to pay more attention to his policies that promote economic growth, there was a noticeable change in sentiment that favored riskier assets. This shift in sentiment resulted in a decrease in demand for the yen.
• With Trump’s victory, global markets experienced a change in sentiment, leading to a preference for more high-risk investments. This shift in attitude frequently results in decreased interest in safe-haven currencies such as the yen and gold (XAUUSD).
• Trump’s negative view on trade agreements and possible alterations to global trade policies have raised hopes for a more robust US economy, which in turn has bolstered the dollar against the yen.

USD/JPY in 2020

The 2020 Joe Biden triumph led to an increase in the value of USD/JPY. This is mainly because investors anticipate a reduction in trade tensions, which prompts them to make riskier investments. Investors turned away from safe-haven assets like the Japanese yen in favor of higher-yielding investments.

Conclusion

The election in the United States presents traders with a variety of opportunities. Relying on a data-driven strategy is essential to achieving better outcomes while trading any type of financial instrument, including futures, commodities, stocks, indexes, and FX pairings.