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Dollar can Go Higher against Euro Ahead of U.S. Election: Ebury

US politics and the dollar

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One of the market's best Euro-Dollar exchange rate forecasters have given their views on the outlook for the EUR/USD exchange rate as the critical November U.S. election approaches.

Ebury - the number 2 ranked EUR/USD forecaster on Bloomberg - have said the biggest risk to markets is not necessarily with which candidate emerges as president, but whether or not the vote is contested.

The prospect of an uncertain vote would reside with a close outcome or a pivotal recount. However, scenario modelling by FiveThirtyEight suggests the likelihood of the election hinging on a recount is a mere 4%.

Nevertheless, Trump has made noise in the past over the prospect of cheating in the postal vote, and with a record postal vote expected in an election that comes during the covid-19 pandemic, some kind of electoral challenge is not hard to imagine.

"In a situation where the vote is contested we think that this would be an initial dollar positive in the short-term as investors flock to the safe-haven currencies and sell higher risk assets. In the long-term, we view this as a dollar negative, particularly if not resolved in a swift fashion, given that it would raise serious concerns surrounding institutional quality," says Ebury Senior Market Analyst, Matthew Ryan.

The foreign exchange playbook suggests the Dollar would be a beneficiary of a contested election outcome given the anxiety it would generate. The Dollar - alongside the Yen and Franc - is considered to be a 'safe haven' currency that tends to appreciate in times of market anxiety.

Ebury and the dollar

The Dollar shot higher on Tuesday amidst dour market sentiment, but this strength has since eased through midweek and into Thursday as investor risk sentiment recovers.

We see the Euro-to-Dollar exchange rate flat at 1.1745 at the time of publication.

The Pound-to-Dollar exchange rate meanwhile retains an element of volatility owing to the influence of Brexit sentiment: the pair had been as low as 1.2863 on Tuesday ahead of a recovery above 1.30 on Wednesday, where it can be found at the time of publication.

If election expectations are wagging the market then investors will likely be reacting to a poll out overnight Tuesday from Opinium Research and The Guardian which revealed Biden’s lead over Trump has surged to a record 17 points. 

Some 57% of likely voters intend to vote for Biden, while just 40% say they will vote for the incumbent president, the survey shows.

Ebury, like numerous other analysts and market participants, are however not yet ready to call the election outcome.

"Leading up to the election, we expect to see both an increase in market volatility and heightened levels of risk aversion as investors remain wary of both a contested vote and delayed result. We therefore see a bit of room for a short-term move higher in the safe-havens prior to the election, including the US dollar. We also see scope for weakness in the higher risk currencies, most notably emerging market ones," says Ryan.

Pound Sterling Live have issued a new guide on the Dollar's outlook with regard to the 'blue wave' outcome, and have commentary and tables from the likes of Goldman Sachs, Barclays, UBS, JP Morgan and more. Get the guide here.

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