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Foreign policy and forex: how US presidential elections influence global currency markets

ThinkMarkets ThinkMarkets 06/03/2024
Foreign policy and forex: how US presidential elections influence global currency markets Foreign policy and forex: how US presidential elections influence global currency markets
Foreign policy and forex: how US presidential elections influence global currency markets ThinkMarkets
Every four years, the United States gears up for its presidential elections, with the whole world waiting in baited anticipation. Traders and investors across the globe closely monitor campaign trails, proposed policies, and public polls, not just for political curiosity, but for clues on how the elections and its eventual winner would affect the global financial markets.

As the President of the United States, whoever wins can reshape the global economic landscape opening up opportunities for traders. In this article, we’ll go through how US presidential elections can influence the forex market.

US foreign policy decisions, often significantly influenced by the outcome of presidential elections, can have far-reaching effects on global economic relations, trade agreements, and geopolitical stability. These factors collectively play a crucial role in defining the strength and movement of major currencies, including the US dollar.

For forex traders, it is extremely important to stay up to date with the news during election years. Historically speaking, the run-up towards the US elections have led to major price swings in currency pairs, such as EUR/USD, GBP/USD, and USD/JPY.
 

Historical impact of the US presidential elections on forex pairs


While historical data is not a sure guarantee that the market will move the same way, it is likely that prior circumstances will cause the same price movements. It’s important to note that the price movements of currency pairs are caused by the accumulation of a multitude of factors, with the US presidential elections being one of the major reasons.

Using EUR/USD and USD/JPY as examples, we’ll look at the price movements in November 2016 and 2020, the pivotal month of the US presidential elections.
 

EUR/USD 2016


This pair often reacts to shifts in US-EU relations. Trade policies that lean towards protectionism or changes in NATO funding have historically caused volatility. Public sentiment on the candidate that’s favoured to win, and their policies have led to fluctuations in this pair as traders speculated on the future of US-EU economic relations.


 
November 1-30, 2016

Let’s look at the price movements of EUR/USD in November 2016, when Donald Trump won with 304 votes as opposed to the 227 votes for the Democrat Hillary Clinton. The price of EUR/USD slipped from 1.1292 to 1.0515, showing a massive 7.4% decrease.

Following Trump's victory over Clinton, there was an immediate weakening of the Euro and a strengthening of the US dollar. This can be attributed to various factors influenced by the election results, such as: 
  • Trump's victory added to the political uncertainty in the Eurozone. This uncertainty was expected to slow Eurozone growth and complicate the job of the European Central Bank (ECB), thereby undermining the Euro
 
  • ​ Trump's fiscal stimulus agenda, which proposed increasing government spending and significant tax cuts, particularly reducing corporate tax rates, was expected to alter the competitiveness of American businesses
 
  • Trump's pledge to implement tariffs on imports was likely to lower the volume of imports into the US, supporting the US dollar’s strength. Additionally, any reduction in immigration could impact remittances abroad
 
  • With Trump’s victory, experts expected the Fed to take a hawkish stance and hike interest rates in December 2016
 

EUR/USD 2020



 
November 1 – 30, 2020

In November 2020, Joseph Biden Jr. won the quadrennial presidential election. Biden's in the 2020 US presidential election was seen as a positive development for emerging markets and led to a weakening of the US dollar against these currencies. The market's reaction was influenced by expectations of normalised trade policies, improved global growth prospects, and uncertainties regarding future fiscal policies in the US.

In the span of 5 weeks, the price of EUR/USD rose by 4.87%, from 1.1602 to 1.2167. Several reasons caused this reaction, including the factors below:
  • The clarity that emerged with Biden's win improved global market sentiment. There were high expectations of US foreign policy and trade relations stabilising, easing tensions and boosting global economy. Wall Street had a strong performance during this period, marking its best week since early April at the time
 
  • Biden's presidency was anticipated to mark a significant shift from the Trump administration's approach, especially in terms of foreign policy and trade relations. The prospect of a cooldown in trade tensions, particularly with China, was viewed positively by the markets
 
  • The anticipation of reduced trade tensions under Biden's administration led to increased capital flow back into emerging markets. The MSCI Emerging Markets Index (EEM), for instance, closed at its highest point in over two years 
 
  • Biden's win raised expectations for fiscal stimulus, which was passed to support economic recovery in the US


USD/JPY 2016




In November 2016, USD/JPY rose from 101.75 to 118.691, recording a massive 17.31% jump in just one month. This major rise could be attributed to several factors, although experts note that Donald Trump’s victory was a key driver. Here are some reasons why the USD was expected to strengthen following Trump’s win:
  • Trump’s proposed policies during the 2016 debates were considered more likely to lead to fiscal expansion, higher inflation, and potentially more aggressive interest rate hikes by the Federal Reserve
 
  • Trump's promises of significant infrastructure spending, tax cuts, and deregulation raised expectations of accelerated economic growth and higher inflation in the US
 
  • The Federal Reserve was already on a path to tightening monetary policy in November 2016, whereas the Bank of Japan maintained an ultra-loose monetary policy to combat deflation
 
  • The Japanese yen is often sought as a safe-haven asset in times of market uncertainty and turmoil. The initial reaction to Trump's win was uncertainty, but as markets began to focus on his pro-growth policies, there was a shift in sentiment that favoured riskier assets, leading to a decrease in demand for the yen
 
  • As global markets absorbed the potential impacts of Trump's victory, there was a shift towards riskier investments. This change in sentiment often leads to reduced demand for safe-haven currencies like the yen and gold (XAUUSD)
 
  • Trump’s critical stance on trade agreements and potential changes to global trade policies created expectations of a stronger US economy, further supporting the dollar against the yen

USD/JPY 2020



Joe Biden’s victory in 2020 caused a rise in the price of USD/JPY. This is primarily due to investors expecting an easing of trade tensions, encouraging riskier investments. Safe haven assets, such as the Japanese yen, were sidelined for high interest yielding assets.

Trading the US elections with ThinkMarkets

The US election opens a wide range of opportunities for traders. Whether you’re trading forex pairs, commodities, stocks, indices, or even futures, it’s important to rely on a data-driven strategy for better results.

This is where ThinkMarkets comes in. We provide our traders with access to an extensive library of guides and feature-rich platforms designed to boost your trading.

Stay ahead of the curve and create an account today!

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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