Guide: understand everything about the US presidential election

As the US elections of November 5 draw nearer, you're probably wondering what this means for the foreign exchange market and the evolution of the US dollar. Our forex experts break it down for you.

Is a recession imminent in the United States? 

The same concerns regularly resurface in the financial markets. A recession is the perfect example of this. After July’s weak employment numbers, recession fears once again rattled the equity markets, sparking a sell-off at the start of August. According to the money market, the probability of a recession in the US within one year currently stands at 41%. This is high – perhaps too high, given the current strength of the US economy.

Consumer spending is extremely buoyant, as recent retail sales figures attest to. And while the household savings rate is falling, this is because consumers no longer have any real need to save: average wages have risen steadily in recent years, anyone holding shares has seen their value leap and home prices have rocketed since Covid – by 150,000 dollars on average. In other words, they are rich! European households are in a very different situation. This explains why hotel occupancy rates are so high, Broadway shows are still sold out and air traffic has never been as dense.

Of course, the economy is slowing and the beneficial effects of stimulus plans (Inflation Reduction Act and CHIPS Act[1]) are waning. But a recession is a remote danger.

[1] These measures were aimed in particular at supporting the development of clean energy and the relocation of the semi-conductor sector.

Are you familiar with the garden economy?

Kamala Harris and Donald Trump have two opposing visions of society: the garden economy vs the jungle economy respectively.

The theory behind the garden economy was explained in 2018 by Harris’ vice presidential candidate, Tim Walz, in these terms:

“The idea that you’re somehow more fiscally responsible by NOT investing in education, healthcare, and transportation makes a nice political talking point—but it makes no sense. Not when we could have a better educated, healthier workforce that lives longer, etc.”

This is a sort of European-style social democracy, with a more interventionist state ready to occupy the social and societal landscape. It is a model that has never managed to gain a foothold in the US.

Opinion polls: what does Nate Silver say?

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2. Nate Silver is THE leading expert on US politics. His latest forecasts show that Harris has a slim lead, but not one large enough to guarantee a victory.

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   Until now, we have seen:

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   • A unified base around Harris
   • A new wave of enthusiasm among Democratic supporters
   • A relatively positive vision for Walz and the reverse for Vance, Trump’s vice presidential candidate.

   Beware: a repeat of the 2016 scenario when Clinton’s campaign was overly confident is possible. Anything is still possible!

What will the US economy look like after the presidential election?

There are many differences between the two candidates. But there are also three continuity factors:

• A persistently high budget deficit (between 5% and 7% of GDP), which will probably be reflected in a structurally strong dollar;
• Substantial labour immigration to meet the needs of the US economy;
• The use of protectionism and economic sanctions. At present, one-third of all countries are subject to one form or other of US economic sanctions. This is huge. On our estimates, Trump’s proposed tariff hikes on Chinese imports could lower Chinese GDP by 1.4%. Those proposed by the Democrats (+25% on vehicle batteries, +100% on electric vehicles, +50% on semiconductors, +25% on medical gloves, etc.) are likely to have a more marginal direct impact on Chinese GDP. This does not mean the Democrats are less firm or less ready to engage in a standoff with China. In reality, they are more subtle. The protectionism put in place by the Democrats is based on high entry barriers for foreign firms wishing to gain access to US public markets and huge subsidies for reindustrialisation policies. Under World Trade Organisation rules, this is unfair competition.

How have previous US elections impacted the forex market? 

The US presidential election and employment figures are the money market’s two key focal points. Historically, the dollar has fallen by 5% in the five days following the result of the presidential election. Many hedge funds take long positions in the dollar just before the vote and take profits shortly afterwards. This year, the Fed is also due to meet on 6 and 7 November. This meeting could hold out some surprises. In September, the Fed cut its policy rate by 50 basis points. To judge by the prices of two-year US Treasury bonds, which are not administered by the Fed and are a good reflection of market expectations, another cut of a similar magnitude is expected in November. This is by no means certain. But if it does materialise, we will probably see a drop in the dollar in the very short term.

A strong dollar in the long term?

On our calculations, the dollar index is 9% overvalued relative to the currencies of its principal trading partners. This is not dramatic. It is far from the levels reached in the 1980s, when the dollar was overvalued by up to 20%, leading to a major global monetary reform.

What is the outlook for the EUR/USD pair? 

The market is clearly too optimistic about the euro. We have seen since mid-August a repositioning on the buy side, but this is mainly due to the drop in US bond yields. Investors are selling dollars to invest the proceeds in other currencies, such as the euro. This is a tactical movement, not a sustainable one, in our view. Deeply negative eurozone data and resurgent budgetary risk in France point to a decline in the EUR/USD pair. This is our baseline scenario.

If Trump is elected, will the dollar tumble? 

Trump makes no secret of his attachment to a weak dollar. But this ambition clashes with reality. A protectionist policy generally leads to a stronger dollar. Tariffs cause a decline in US imports, resulting in weaker demand for foreign currencies relative to the dollar. If put into practice, this mechanism could lead to a stronger dollar next year.

And what if Trump perseveres regardless? 

There are two principal options to drive down the dollar. One would be to put the Fed under the control of the White House and to force it to buy huge amounts of US bonds at an extremely low interest rate. By issuing massive volumes of US bonds discounted by the Fed, the US could also buy foreign currencies to weaken the dollar. We think an amount of 2,000 billion dollars would be necessary. This is not nothing in the medium term. All of this appears to us to lack credibility and is unrealistic given that Congress is opposed to any oversight of the central bank.

Key dates to watch: