The markets are looking forward to US Election Day on Tuesday. A full Democratic sweep remains the most likely outcome. However, last week’s equity sell-off and the EUR/USD pair slump, which were triggered by a combination of the second wave fears, bad corporate news and extremely dovish stance by the European Central Bank probably considerably erased pre-positioning for such a result.
The better for Democrats, the worse for the dollar
Joe Biden is leading the national polls by 51% to 43.5% and as a consequence betting markets estimate the likelihood of his victory at roughly 60%. However, a landslide Biden victory is needed to lift the EUR/USD pair immediately and spurr a strong relief rally, because Donald Trump has not guaranteed he will restrain from disputing the election outcome. Whether the final result will be known on Wednesday morning depends on how close the case is with Florida acting as a pivotal state for keeping Trump’s reelections hopes alive.
The outcome of the November 3rd election is crucial also from the fiscal perspective. A clean Democratic winning brings closer a much-disputed US COVID-19 package, which value must exceed 2 trillion US dollars according to the Democrats. In the case of a divided Congress, i.e. the Republican Party retaining the control in the Senate, the stimulus would be smaller and most probably delivered at a later date. The size and timing of the fiscal expansion will remain a key driver for the EUR/USD pair. The package will result in evidently stronger inflation in the US. Therefore much lower real rates, which in the absence of nominal rate changes will act as a key factor for the FX market in the years ahead. Moreover, some argue that in the long term the stock of the US debt and the value of accumulated current account deficit are to become so high, that risk of unsustainability will emerge unless the greenback (the dollar) depreciates considerably.
Quite a week for the markets
Apart from the US election, markets participants will monitor the outcome of the Federal Reserve and the Bank of England meetings closely. The latter may deliver additional easing on it’s Thursday meeting. Today the markets will be focused on the final PMI numbers for the Eurozone. The PIM data will indicate first estimates for some COVID-19 struck countries like Spain and Italy, which reintroduced lockdowns prior to Germany, France or Great Britain. The Brexit trade negotiations are to continue as well. Tight ranges and a lack of conviction are to dominate before the US election. The EUR/USD exchange rate depreciates, and it is traded below 1.1650. The GBP/USD pair tests 1.29 boundary and is close to last week’s lows. The yen strengthens, but the USD/JPY pair fails to set new lows and moves sideways instead.