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With the US Midterm Elections taking place on 3 November, currency markets will be watching closely. Although the presidency is not being contested, the election could have important implications for the US economy, government spending and the future direction of the dollar.
For UK businesses and individuals with upcoming US dollar payments, the result could introduce further currency volatility at an already important time for the markets.
The elections will determine the balance of power in Congress, with:
• 435 House seats being contested.
• 35 Senate seats up for election.
• 39 governorships being decided across 36 states and three territories.
The outcome will influence how easily the government can introduce new spending plans, manage borrowing and implement economic policies over the next two years.
Why could the election affect the dollar?
Although the president will remain in office, the balance of power in Congress can influence fiscal policy, government borrowing and economic growth.
These factors matter to currency markets because they influence inflation expectations and, ultimately, the Federal Reserve's interest rate decisions.
Generally, stronger economic growth and higher interest rate expectations can support the dollar by making US assets more attractive to international investors. Conversely, political uncertainty or concerns surrounding government borrowing can put pressure on the currency.
Three possible election outcomes
Markets are currently considering three broad scenarios:
1. The Republicans retain control of both chambers
This could provide greater scope for the government to continue its existing spending and economic policies. If this supports growth and inflation expectations, it could reduce the likelihood of interest rate cuts and provide some support for the dollar.
However, concerns about government borrowing and the longer-term fiscal outlook could limit any gains.
2. Congress remains divided
A divided Congress could restrict the government's ability to introduce major policy changes. The immediate market reaction may be relatively limited, particularly if this outcome is already reflected in currency prices.
However, disagreements over government funding and future spending could create uncertainty further down the line.
3. The Democrats take control of both chambers
This could initially place some pressure on the dollar, as markets assess the potential impact on government spending, borrowing and future economic policy.
However, the extent of any movement will depend heavily on how much of this outcome has already been priced into the market.
An important consideration: The result itself may not be the biggest driver of currency movements. If the outcome differs significantly from market expectations, the reaction could be much greater. A delayed or contested result could also prolong uncertainty.
The Federal Reserve remains a key influence
While the elections will be closely watched, US interest rate expectations remain one of the biggest drivers of the dollar.
The Federal Reserve's October meeting took place just four days before the election, with policymakers keeping rates unchanged following September's increase.
The outlook for future interest rate decisions will remain important. If inflation proves more persistent than expected, the Fed may need to maintain higher rates for longer, potentially supporting the dollar.
Alternatively, weaker economic data or a more dovish approach to monetary policy could put pressure on the currency.
This means the dollar will be influenced by a combination of political developments, economic data and expectations surrounding future interest rates.
What does this mean for businesses and individuals with USD exposure?
For businesses
Companies importing goods from the US, paying overseas suppliers or managing dollar-denominated expenses could be exposed to unexpected currency movements.
Even relatively small exchange rate changes can have a noticeable impact on profit margins, particularly where businesses make regular or high-value international payments.
For individuals
Anyone purchasing overseas property, relocating to the US, paying international school fees or transferring savings could also be affected.
Where payments are linked to a fixed completion date or contractual deadline, an unfavourable exchange rate movement could significantly increase the sterling cost.
What can you do to manage potential volatility?
With the election results expected overnight UK time, businesses and individuals with upcoming dollar payments may benefit from considering their options in advance.
There are several ways to manage currency exposure:
• Forward contracts: Secure an exchange rate today for a payment due at a later date, helping protect against unfavourable market movements.
• Limit orders: Set a target exchange rate and automatically execute a transaction if the market reaches that level.
• Rate alerts: Receive notifications when the exchange rate reaches a level you are monitoring.
• Staged transfers: Split larger currency requirements into smaller transactions rather than exchanging the entire amount at once.
Each approach has different advantages and considerations, depending on payment deadlines, risk appetite and individual circumstances.
Indigo FX: Helping you navigate currency movements
Political events, economic announcements and central bank decisions can all influence exchange rates, sometimes with very little warning.
At Indigo FX, we help businesses and individuals manage their international currency requirements with access to competitive exchange rates, dedicated dealers and practical solutions for managing currency exposure.
Whether you have an upcoming overseas payment or simply want to understand how market developments could affect your exchange rate, our team can provide guidance on the available options.
For further information or to discuss an upcoming currency requirement, contact Indigo FX.
Market commentary is provided for informational purposes only and should not be considered financial or investment advice. Currency markets can move in either direction, and future exchange rate movements cannot be guaranteed.
