The Pound has seen some noticeable weakness since the news of Brexit and here at Foreign Currency Direct we work to protect our clients from further losses in a volatile market.
The US Election will, I believe, have influence over any interest rate hike decisions which are likely to impact exchange rates, despite high expectations we have not seen one since December 2015. Those looking to buy US Dollars should make reference to our live exchange rate page regularly as further movements for GBP/USD are expected.
I am predicting GBP/USD to trade between 1.20-1.25 until November with a Trump victory being the real risk which could rattle markets. A Trump victory could see USD weakness which could push GBP/USD exchange rates up to 1.30 or above. Whilst I would expect a Clinton victory to cement USD strength with a move below 1.20 on GBP/USD.
It appears a Clinton victory is the more likely option at present and this could lead to a further tightening of the US Dollar as it makes an interest rate rise more likely. Interest rates have been the real driver for GBP/USD in 2016, as long as everything runs as markets now expect ie a Clinton victory, the USD should rise.
Read on to find out more about why this could happen as well as what surprises could be lurking for US Dollar buyers and sellers.
What happens during the US election?
On the 8th November 2016 the US Presidential Election will take place. This will determine who becomes the leader of the world’s largest and most influential economy. The US sees Republican candidate Donald Trump go head to head with Democratic Hillary Clinton. Ever since the conventions in June when the nominees were decided, it has been a fairly close call but lately Clinton has taken the lead in the polls more through Trump ‘gaffes’ rather than any particular Clinton strength. Trump’s prospects in this now two horse race have been written off countless times and few believed he would get this far. Writing off Trump has been a mistake so far and his anti-government and ‘America First’ view resonates with millions of Americans.
The election is key to predicting future US movements as whilst the Federal Reserve is independent from politics it is accountable to Congress in explaining decisions. Congress has also set economic goals including maximum employment and stable prices to help direct the economy.
How will US Dollar exchange rates react to the US election?
It is common during times of political uncertainty to see a currency weaken and this was true of the US Dollar during the 2012 election when Barack Obama was elected for a second term. Although this was not the case in 2008, when the US Dollar rose, especially against a much weaker Pound. This coincided with the Lehman Brothers collapse which led to USD rising.
The US dollar will not always react in the same way as other currencies, however, in times of uncertainty the US Dollar can actually strengthen since investors will hold US dollars to safeguard against risk elsewhere, it is a ‘safe haven’ currency. Paradoxically the US Dollar can benefit from uncertainty in the United States!
This works the other way around too, in times of good or positive news the Dollar can weaken as investors look to sell off their ‘safe’ USD positions or investments to invest in other riskier global assets which offer a higher return.
Since the US election by nature presents uncertainty to the market, once that uncertainty is removed by a new President being elected the US Dollar may actually weaken. This is because the US Dollar as a safe haven currency can weaken once certainty is presented to the markets. As mentioned above this was seen following Obama’s last victory for the US Dollar although conditions are a little different this time around because the FED are expected to raise interest rates in the foreseeable.
Is the real battle the likelihood of raising rates versus the election uncertainty?
The prospect of raising interest rates has really been the big driver on US Dollar exchange rates this year and last year. Generally speaking the higher a central bank’s interest rate the stronger the currency. With the Eurozone, Japan and Switzerland all using negative interest rates, the US however, is leading the way back to ‘normalisation’ in interest rate policies with a move higher. The rate rise last year in December and further hikes projected this year are all pushing the Dollar to multi year highs against all currencies.
With the US looking closer to an interest rate rise which may make the US dollar more attractive to hold, I think the markets are viewing the election with interest rate tinted lenses in their spectacles. The election’s significance to markets is currently greatest in terms of its impact on the likelihood of a US Interest rate rise.
November 2nd is a key date since we learn of the next Interest rate decision in the US. A rising of the rates then could trigger some US Dollar strength. I would personally expect the holding back of any hike since it is so close to the election date on the 8th. Whilst the Fed should be wholly independent of the election and politics – Janet Yellen, Chairlady of the Fed has reiterated this numerous times – you have to expect it would be rather destabilising at an already unstable time in America to raise rates then.
If they hold fire the US dollar should weaken a little as investors betting on a November hike sell off their positions. For any clients looking to buy or sell the US Dollar, the first few days of November will be a very interesting time!
The USD may weaken on the Fed holding fire on rate hikes on the 2nd, before rising on the 8th and 9th if Clinton takes victory. Of course, if the Fed raise on the 2nd and Trump takes the White House it will be a very different picture!
If you are buying or selling US dollars have and are waiting on the election outcome there are things you can do now to help prepare and plan and manage for the future. Have a look at some of our contract options here or why not submit a rate request to help us keep up to date with your situation.
Clinton Versus Trump – How will this impact the US Dollar?
Helpfully Trump has outlined some of what he would do in his first 100 days as President which includes a raft of measures which could prove destabilising in the short term for the US and in my opinion weaken the US Dollar or make any interest rate rise less likely.
Measures include the process of removing 2 million ‘criminal and illegal immigrants’ and the denial of visa free travel to countries which refused to take back their citizens. Trump has also not been the strongest critic of Russia, how would this pan out in foreign policy? Trump has also some very strong anti-trade rhetoric which will not fill markets with confidence. As explained above the US dollar can actually strengthen in times of uncertainty. So we have this strange situation where a Trump victory might strengthen the US dollar if it looks like he is massively destabilising the US or the global economy.
Trump has threatened to cut off trade links with China and other nations if they are not biding by what he sees as fair or right. If this is the case markets may become unstable and this would see the US dollar rise as investors liquidate their foreign (riskier asset) holdings. Having said that I would expect the attitudes to interest rates to remain the main driver on the US Dollar and the election is important because it shapes the likelihood of this happening.
For any other currency an unexpected event would weaken the currency concerned. Just look at Sterling and the Brexit as an example of how political uncertainty can weaken a currency.
A Clinton victory should see a surge on the US Dollar as a rate hike becomes more likely and essentially it is business as usual for the United States. Whilst she is not the most admired person in the US she is seen by markets as a safer pair of hands and should make a US rate rise more likely.
Conclusion - The outlook for US Dollar rates
In my opinion with an interest rate hike less likely under Trump as the economy readjusts to what is happening, the US Dollar could be weaker for longer . One of the bigger drivers on USD exchange rates has been the prospect of interest rate hikes. This has led to a strengthening of the USD based on the expectation of four hikes in 2016. This has since been reduced to just two hikes but I personally believe as we get closer to the election the chance of any further hikes will diminish further.
GBP/USD will of course continue to be strongly effected by volatility as a result of the UK Referendum but I also believe the US Dollar will remain strong as markets expect a rate hike ‘sometime in the future’ whoever is in the White House on the 9th November. The overall position will remain even if the date changes. A Clinton victory should see a December hike, a Trump victory might see a February 2017 hike – for example.
Businesses are naturally concerned about change and the markets will need to plan for all scenarios. The most uncertain scenario seems to be a Trump government which poses more questions because of the lack of experience and un-costed economic plans. I think this uncertainty will either weaken the US dollar or hold back the US dollar strength we would see from a Clinton Presidency as it makes any Interest rate hikes even less likely as mentioned previously.
As we approach the election any big signs of Trump leading polls could shape Dollar exchange rates. Since it is a global currency and used as a safe haven by investors we could see the Dollar rising if Trump came into power because investors would be fearful about the impact on the US and global economy.
Overall a Trump Presidency I feel makes a US interest rate rise a little less likely and is the big risk factor for exchange rates. Markets have so far priced in a Clinton Presidency so if Trump swings it expect volatility on the US Dollar. If Clinton wins the US Dollar should rise as investors attention turns to a very likely Christmas present from the Fed to global markets. That of the ever elusive and ever so important Interest rate hike.
Just expecting events to go your way is not enough on exchange rates, just look at the Brexit, this was unexpected and has played havoc with many client’s plans on the Pound, If you need to buy or sell the US Dollar the next couple of weeks are key to maximising your exchange. Exchange rates change every second and if you want the best deals it pays to be prepared.