Movements in the forex market are largely dependent on significant global economic and political events, such as changes in oil prices, UK’s decision to leave the European Union, meltdown of Chinese and Asian stock markets, or worsening of the Syrian crisis.Currency prices usually react to such events.
However, one event that is expected to assume the center stage and attract the attention of the entire forex market in near future is the United States presidential election, which is just around the corner.
Historically, the US election year has been a major focal point in determining the course of financial markets, and the forex market is no exception.
Considering the vulnerable situation of many economies currently, the US election will more than ever impact the forex market. As it draws closer, volatility in the forex market will increase.
The election is therefore of great interest, as the general rule is that investors and traders prefer calmer waters to looming uncertainties.
Neck to neck race
The gap between Hillary Clinton and Donald Trump, which was significantly wide only a few months ago, has now shrunk to a mere 2%, a margin that is too close for comfort for both candidates.
Some polls suggest that Clinton is leading Trump by 47.5% to 43.0%, while others suggest a much closer gap of only 1%. It seems the just concluded first TV debate played out in Clinton’s favor.
Just a few months ago, Clinton was so far ahead that Trump was considered virtually out of the race, but she appears to have lost ground, especially in the traditionally divided states. The race is now neck to neck and could tilt in favor of either candidate over the next two months.
Effect to the world economy
The US economy, major economies around the world, and the financial markets are watching the election campaign very closely, as it will have a direct or indirect impact, regardless of the outcome.
The US Dollar has shown strength over the last few months mainly due to news on increasing interest rates , strengthening of the US economy, and weakness of other major global economies.
Traditionally, the forex market has witnessed calmer and positive trends in the wake of a strong dollar.
However, the impact of the US election on the dollar will largely determine the future course of the market. This is one thing for sure—and it will be substantial.
In order to understand what is in store for the US and the rest of the world, we have to understand the economic agenda of both candidates, which will invariably determine the fate of the US Dollar and affect the forex market.
Hillary Clinton’s policies and the forex market
In line with the general economic ideas of Democrats, Hillary Clinton supports an increase in growth and productivity. She has categorically stated that improving the living standards of middle class and hard working Americans is her priority, and everything else will follow.
However, this would also mean that the upper class and businesses, especially large corporations, would have to share their profits.
Forex analysts are keenly analyzing the extent to which sharing is sustainable, beyond which the US Dollar would get affected.
Another factor forex observers are evaluating with caution is her idea of attaining long-term growth instead of short-term growth, a strategy that would result in a more regulated Wall Street.
Her determined plans for sustainable economic growth would be costly in the short term until the economy begins to reap its fruits.
In the forex market, the US Dollar will most certainly be able to absorb the initial jolts in case Hillary Clinton wins the ticket to the Oval Office. This means that the current trend of currency pairs will become less volatile and rather stable.
Besides the US Dollar, the Chinese Yuan and the Japanese Yen are also expected to post gains, as her demand-pull economic model will also result in higher imports.
These policies would mean that speculation is discouraged, a prospect that all pundits in the forex market have received positively.
With Hillary as President, the forex market is expected to move towards a stronger US Dollar but at a slower pace. This will mean that the traditional safe havens will also play their part in the forex market.
Donald Trump’s policies and the forex market
Like his other policies, Donald Trump’s economic and monetary policies are being perceived as a collection of words without substance and directed towards follies of the past, instead of current and future challenges.
Some of the main elements of his economic and monetary policies have highlighted what is in store if he gets elected. They are clearly geared towards the slogan “America First.”
The problem here is that the global economic scenario does not permit this type of policy making. There is only one thing certain—nothing is certain about his policies.
This situation is certainly going to draw a jittery reaction from the forex market. With other major currencies already under pressure due to various reasons, this is not good news.
He has pledged to impose or increase tariffs on China and other economies he perceives as exploitative of the US. Furthermore, he is more receptive to the idea that economic and monetary policy should be driven by business.
This is something forex market analysts have never been comfortable with. However, his seesaw postures on critical issues are keeping everyone guessing.
Both candidates have agreed on the need for a stronger US Dollar, which is good news for the forex market. The Republican monetary policy of debt reduction and job creation is theoretically the right approach towards a stronger US Dollar.
However, it is their ability and an actual plan for achieving it that have raised concerns in the forex market. On the other hand, the Democrats have shaped their monetary policy by way of increasing public sector jobs and promoting a larger government role.
This will somewhat keep a tighter grip on the US Dollar but will be difficult to achieve as the short-term jolts would be quite severe.
In case Donald Trump becomes the next president, the forex market is expected to react severely and the immediate impact will be a relative weakening of the US Dollar.
However, the pace will be somewhat mellow as there are not many alternative options currently available in the forex market.
Conclusion
In a nutshell, whether Hillary Clinton or Donald Trump prevails, the US presidential election is certainly going to induce impulsiveness in the forex market until the dust settles.
All the market’s serious players are definitely favoring Hillary Clinton, but only as a lesser evil. However, the forex market’s exact reaction will only be seen when the US swears in a new president in January 2017.
