While accounting for the ongoing worldwide impact of coronavirus, the one news item that has dominated the global agenda during Q4 is the US Presidential election. Even now that Democrat candidate Joe Biden has been declared the winner of the election, the protestations of the Trump administration have meant that transition of office has not been as smooth as in previous years.
This has only served to exacerbate the uncertainty being faced by both domestic and global financial markets, with the US Dollar (USD) particularly vulnerable to the election and its macroeconomic impact.
Of course, the election of Biden may cause even more market volatility in the short-term, particularly given his apparent desire to hike taxation for large corporations. Trump’s refusal to accept his electoral college defeat also exacerbated uncertainty in the markets, despite the lack of success for any of his legal challenges to date.
For those watching and waiting on the eventual outcome, it’ll be an uncertain period of time, not least for traders and investors looking to plot where USD moves next in response. But how will Biden’s win impact the US economy and the greenback?
This article is an educational guest post, it was written by Ed Smith a freelance content writer
One thing that all investors will agree with is that markets don’t react well to uncertainty. This can be seen in the performance of the British Pound (GBP) after the UK’s decision to leave the European Union, for example. On a national level, elections bring uncertainty, unless you can be sure of the result.
Historically, this certainly isn’t the case as far as the US election is concerned, while the uncertainty remains prevalent even though Biden has surpassed the 270 electoral college votes needed to win.
Traders will have been wondering if their next move is to stick or twist on their position, and the fact remains that those with a risk-averse approach may still be unsure given the so-called legal challenges being filed by the Trump administration.
However, the good news is that we can see how the US election affects currency markets from past examples. And one thing that traders can certainly learn is that the greenback will increase its value right after the result is declared – no matter who wins.
A big reason is that a result ends the lingering uncertainty. But it’s also possible to see that, in nine out of the 10 elections since 1980, USD has strengthened in the first 100 days of a brand-new administration. This is according to the trading platform Oanda, which has tracked market movements pre and post US elections for years now.
The knock-on effect is felt around the world, with a strong USD leading to a drop in US exports – but making it cheaper for the US to import goods from elsewhere.
Interestingly, we can also look at history when deciphering how the triumph of a Democrat or Republic nominee will impact the USD.
If Biden is confirmed as the 46th President of the United States, traders and analysts will note that the USD value increases by an average of 4% in the wake of a Democrat win.
Historically, US economic performance also tends to improve under a Democrat candidate, with Barack Obama’s premiership offering a relevant case in point.
While Obama took the reins in the midst of the great recession, he still managed to drive a recovery and oversaw huge growth for stock indexes such as the Dow Jones, with Trump’s economy appearing to build on this foundation during his four-year term.
As a note of caution, however, it must be said that a Biden presidency (combined with a Democratically controlled congress) may be initially damaging from the perspective of investors.
According to one report issued by Goldman Sachs, Biden’s proposal to raise corporate taxes and enact regulatory changes in the big tech space could decrease the popularity of US equities when compared with international assets, creating a trend for USD weakness in the process.
This trend may ultimately be accelerated by the deployment of a proposed $2.2 trillion stimulus package for the coronavirus pandemic, causing the dollar to lose value on the global stage despite greater economic stability being introduced at home.
If you were to observe the protests of Trump supporters at Washington’s Capitol Hill over the weekend, you could be forgiven for thinking that the incumbent President retained an excellent chance of overturning his apparent defeat to Biden.
However, this is at odds with the fact that there remains no concrete evidence of electoral fraud, with this being reaffirmed by the fact that all of Trump’s lawsuits have so far been thrown out of various state courts.
Of course, in the event that Trump was to overturn Biden’s electoral college projection, it’s widely thought that he would pursue the same protectionist policies that characterised his first term.
Packaged under the banner of Trump’s ‘American First’ mantra, this will arguably boost the overall strength of the USD (which has been observed for much of the Covid-19 outbreak), while simultaneously, according to some, isolating America from an international trade perspective and perpetuating the nation’s costly trade wars with China and similar contemporaries.
Perhaps somewhat surprisingly, this would arguably provide investors with some much-needed clarity in the near-term, although another Trump term could also cause continued volatility for a raft of asset classes across the board.
Investors have the advantage of being able to inform their trades using historical insight, even though Biden may not initially have the same positive effect on the USD as previous Democrat incumbents.
However, this years’ election has been dogged by the coronavirus, so investors must also look to trade this proactively if they’re to open successful positions. This means that the historical trading factors and performance must be measured against the impact of Covid-19, and the administration’s ability to stop its spread and curb any further financial impact.
Then again, this is something that investors have been contending with for most of 2020. As such, it does indeed leave us with the election as, for the time being, just one factor in an uncomfortable and uncertain climate.
If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter.
Ed Smith – Ed took a keen understanding of business through his studies and early business ventures. He now looks to advise start-ups and is extremely keen to make sure every entrepreneur gets the advice which could make their business venture a success. He has been a guest author on various high authority business sites.
The5%ers let you trade the company’s capital, You get to take 50% of the profit, we cover the losses. Get your trading evaluated and become a Forex funded account trader.Get Your Forex Funded Trading Account