Currency markets seek direction ahead of US elections

At the time of writing, weekend polls and election markets appeared to indicate a narrowing gap, making the outcome of the US presidential election a real toss-up. Macroeconomic news released during the week was also negative for the US dollar, pointing to weakness in the US labor market, and was better than expected for the eurozone economy. However, overall changes were modest as the unpredictability of Tuesday’s election loomed over financial markets. Even Thursday’s Federal Reserve meeting, usually a major event for markets, faded into the background.

There is nothing more to add to the tidal wave of analysis and predictions regarding the election except to reiterate that it is a toss-up. In any case, life goes on, and this week we will also have a meeting of the Federal Reserve System, at which it is expected to cut the rate by 25 basis points. The Bank of England will also meet on Thursday with the same expectations as the Fed, and the Standing Committee of the National People’s Congress meets in China during the week, raising the possibility of more stimulus being announced.

Euro

Last week we finally got some good (if belated) economic news from the eurozone: GDP growth in the third quarter was significantly higher than expected. Year-on-year inflation data for October, which turned out to be higher than expected, gave new impetus to the euro.

Expectations for a 50 basis point rate cut at either of the next two meetings continued to decline as a result, although the euro, like all currencies, is reacting more strongly to news of the US election and will continue to do so this week. European economic and political news will be very scarce.

US dollar

The weak labor market report contradicts the strong US GDP data for the third quarter. Wage and inflation data continue to show resistance and, if not for the US election, would likely have merited the attention of the Federal Reserve at its meeting on Wednesday.

Although the Fed will almost certainly confirm market expectations and lower the rate by 25 bp. This week, market attention will be focused on forecasts for the next and final meeting in 2024, where expectations for a pause, although low, are starting to rise.

Pound sterling

The announcement of a softer-than-expected UK budget triggered a sharp decline in the stock market, although the damage so far is nowhere near the fiasco that ended Liz Truss’s presidency. The pound was also hit and although it recovered towards the end of the week, it still lost some ground against its European peers. This unpleasant market reaction should be a key topic of discussion at Thursday’s Bank of England meeting, with the Monetary Policy Committee’s view of its impact on policy beyond the US election being a key driver for the pound.