How the 2024 US Election May Impact the Forex Market

The US election on November 5, 2024, is a critical event not just for American politics but for global markets as well. With Donald Trump running as the Republican candidate and Kamala Harris representing the Democrats, the outcome of this election could have significant implications for the forex market. As traders assess the possible policy directions of each candidate, volatility in the currency market is likely to increase. Let’s explore how this election may impact forex trading and what to watch for as results unfold.

1. Market Uncertainty and Increased Volatility

Leading up to the election, the forex market is expected to experience heightened volatility. Political uncertainty creates an environment where market participants are unsure about future economic policies, and this often leads to rapid movements in currency pairs, especially involving the US dollar (USD).

• Safe-haven currencies: In periods of political uncertainty, traders often flock to safer assets such as the Japanese yen (JPY) or Swiss franc (CHF). Depending on the election’s perceived risk to the US economy, we may see increased demand for these currencies as a hedge against volatility.
• USD fluctuations: The US dollar could experience wide price swings as the election approaches, with poll results and debates impacting market sentiment. Investors will closely monitor both Trump’s and Harris’s economic proposals, as any drastic policy shift could influence the dollar’s strength.

2. Potential Policy Shifts and Market Reaction

Both candidates represent significantly different economic visions. These contrasting approaches will affect market expectations regarding the US dollar, interest rates, and overall economic growth.

• Trump’s economic stance: Trump’s policy platform includes potential tax cuts, deregulation, and a focus on boosting domestic energy production. His protectionist trade policies could also resurface, affecting relationships with key trading partners such as China. A more isolated US trade stance could lead to a stronger dollar, but at the cost of potential global market disruptions, which could weaken overall global economic stability.
• Harris’s economic platform: Kamala Harris, as the Democratic nominee, has emphasized investments in infrastructure, clean energy, and more progressive taxation. Her policies may result in higher government spending, which could push inflation expectations higher. This could prompt the Federal Reserve to raise interest rates, which would likely strengthen the USD.

3. Impact on the Federal Reserve and Interest Rates

The US Federal Reserve plays a key role in shaping monetary policy, which in turn has a direct influence on the forex market. Though the Fed is an independent body, election outcomes can impact its approach to managing inflation and economic growth.

• Trump and the Fed: Trump has previously been critical of the Federal Reserve, particularly during his first term. If re-elected, his influence could sway future appointments to the Fed, leading to a more dovish stance that favors lower interest rates, which would weaken the dollar. Alternatively, his tax cuts and deregulation policies could spur economic growth, leading to rate hikes and a stronger USD.
• Harris and the Fed: Harris is expected to support a more conventional, inflation-targeting approach, which could result in rate hikes if inflation surges due to her spending policies. A strong focus on fiscal stimulus might also prompt a tightening of monetary policy, depending on the inflation outlook, which would bolster the USD.

4. Trade Policies and Global Currency Markets

The election’s impact on US trade relations will play a major role in the global forex market, especially for major currencies like the euro (EUR), Chinese yuan (CNY), and British pound (GBP).

• Trump’s potential second term: If Trump wins, there could be a return to his previous trade strategies, including tariffs on imports from countries like China and the EU. This could result in increased currency market volatility, especially for USD/CNY and USD/EUR pairs, as trade tensions would disrupt global supply chains and economic growth prospects.
• Harris’s potential presidency: Harris has signaled support for multilateral trade agreements and international cooperation. A more stable and predictable trade environment could support global growth, strengthening currencies like the euro or pound, while the USD may weaken slightly as global risk appetite increases.

5. Impact on Safe-Haven Assets and Risk Sentiment

The forex market often reacts to broader risk sentiment, especially in times of political uncertainty. The 2024 election, depending on how close the race becomes, may drive traders to adjust their positions in response to perceived risk.

• Increased demand for gold: If the election becomes a source of market anxiety, especially if there is a contested result or delayed vote counts, we could see an increase in demand for gold. This would impact the USD, as gold prices tend to move inversely to the value of the US dollar.
• Risk-on versus risk-off: A Trump victory might initially spark a “risk-on” sentiment, particularly in US equity markets, which could lift the USD. However, if Harris wins, traders may adopt a more “risk-off” approach, leading to a temporary flight to safe-haven currencies until her policies are clearer.

Conclusion: Preparing for Post-Election Forex Moves

As the 2024 US election nears, forex traders should prepare for potential volatility and significant market shifts. Both Donald Trump and Kamala Harris represent distinct policy paths, each with its own implications for the US dollar, interest rates, trade policies, and global market sentiment.

The key for traders will be to stay informed, watch market reactions closely, and apply disciplined risk management strategies. Whether the election leads to a stronger dollar under Trump or a more balanced global outlook under Harris, the forex market will likely remain highly sensitive to the election’s outcome. As always, navigating these changes with a clear, informed trading plan will be essential for success.