Written by Convera’s Market Insights team
Volatility surges on polling day
George Vessey – Lead FX Strategist
The US dollar and US Treasury yields are treading water as Americans head to the polls for the US election. Investors pared bets on Republican Donald Trump prevailing after a new poll suggested Democrat Kamala Harris might be edging ahead in some swing states. The changing US presidential electoral landscape will continue driving price action in the short term, with volatility expectations elevated.
The rise in yields over the past month suggest that the market’s anticipation of limited fiscal restraint and persistence of inflationary risks, are getting priced in to some extent, regardless of who wins the presidency. Expectations of calibrated monetary policy easing affects the shorter end, while concerns over above-target inflation and increased debt supply weigh on the longer end. Overall, bond market volatility is at a 1-year high as investors navigate an environment of heightened uncertainty led by numerous drivers. Meanwhile, despite the recent softening of the US dollar, traders are braced for wide swings, with options pricing climbing sharply. USD/CNH one-day implied volatility is running at levels not seen since the 2020 US elections. One-week volatility in EUR/USD is now the highest since 2022, with traders factoring in a move of about 1.6% on either side and overnight implied vol for EUR/USD hasn’t been this high since 2016.
Beyond the US election, the dollar and yields will be driven by economic news flow and associated Fed expectations into the year-end and early 2025. The next presidential party’s policies will affect growth expectations in the US and elsewhere over the medium term, but the composition of Congress will prove key in shaping the new president’s room for policy manoeuvre.
Harris bets push euro to two-week high
Boris Kovacevic – Global Macro Strategist
The euro pushed to a two-week high and briefly traded above the important $1.09 mark as investors continue to trim positions related to the Trump trade. The paring back of bullish dollar bets ahead of the US presidential election on Tuesday was caused by Democratic candidate Kamala Harris surpassing her Republican opponent in a new poll in Iowa. With no crucial data to go by yesterday, investors focused on that narrative to drive price action. Global equities and bonds mainly treaded water as cautiousness prevailed before the political event.
The ascending trend line that started in September 2023 is still intact, as long as the level around $1.0770 holds. The local peak at $1.12 would become the next target on the upside if Kamala Harris comes out on top in the presidential race. A Trump win could see the currency fall below $1.05 in the short term. This uncertainty is reflected in options markets, where investors have turned positive the VIX for the first time this year and where implied FX volatility is approaching 2024 highs.
Below $1.25 or back above $1.30?
George Vessey – Lead FX Strategist
Sterling found some decent support versus the US dollar at its 200-week moving average located in the lower realms of $1.28 after the weak US jobs report and improved polling for a Democrat win in the US election. Meanwhile, last week’s UK Budget has made life more complicated for the Bank of England (BoE), though a rate cut on Thursday is all but priced in.
One major support for the pound over the last six months has been the expectation that the BoE will be slower to cut rates than either the Fed or the ECB, meaning UK lending rates have been higher than those elsewhere. Currently, there is a 93% chance the BoE could deliver a quarter-point cut this week, while the chance of a cut from the Fed is also seen as a done deal according to overnight index swaps. A number of UK macro metrics have recently weakened though, and inflation is more in line with the rest of the G10. Services inflation, which has been the guiding light for BoE monetary policy is now at 4.9%, more than half a percentage point below the BoE’s 5.5% forecast. The combination of extra fiscal stimulus and a volatile US election aftermath might deter the BoE from commenting too much on its next steps though. Plus, a lot will depend on the two UK inflation reports we get between now and Christmas.
Much depends on the outcome of the US election for sterling’s near-term trajectory, but absent a negative Red sweep scenario (pushing GBP/USD below $1.25), seasonality might be on sterling’s side. The third quarter has traditionally been by far its best quarter of the year for performance. Over the last decade, the average Q3 performance for GBP/USD has been a 1.4% uplift. However, a lot of ground needs to be made up since the pair is down over 3%, quarter-to-date, having suffered its worst October since 2016.
Pound still licking post-Budget wounds
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 4-8
All times are in GMT
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
