Election hedging
Boris Kovacevic – Global Macro Strategist
The US dollar was flat on the week as investors decreased their bets on a Trump presidency and as US macro data showed a slowdown in manufacturing and job growth. Equities fell for a second week due to higher than expected inflation numbers on Thursday and Kamala Harris having gained some ground in recent polling. The only constant force in markets seems to be the grind higher in bond yields as neither candidate seems to have a plan for bringing spending on a sustainable path.
Friday’s macro data out of the United States disappointed across the board. The US added 12 thousand workers to its workforce, the lowest gain since December 2020 and lower than both the expected (113k) and previous (223k) figures. Investors have been tempted to dismiss the print due to weather related events such as the occurrence of hurricanes in September and October. Next months data will be crucial to gauge how likely the Fed is to cut rates in November and December. We think that both meetings are live events and more likely than not to be accompanied by 15 basis point cuts.
Election hedging is intensifying in FX markets as the implied dollar volatility for the week ahead jumped to the fifth highest level (15.5%) since at least 2011. Traders are positioning for large price swings and are hedging their bets going into the US presidential election. Some positioning unwind has been visible over the past week, though. Recent polls suggest that Kamal Harris has been gaining favorability in the swing states at the same time as the odds of a Trump win on betting markets continue to fall. Investors at Polymarket and Kalshi still see the former president in the lead. However, Predictit now has Harris narrowly winning the contest. EUR/USD has opened the week higher after having fallen for four consecutive weeks. The bounce back from $1.0760 to $1.0880 is a function of the falling winning odds of a Trump presidency. The euro, yen, and pound will remain highly sensitive to the election results.
Selling pressure before BoE
Boris Kovacevic – Global Macro Strategist
The British pound has come under selling pressure after investors turned sour on the UK budget and as the Bank of England prepares to cut interest rates once again this week. Government bond yields rose sharply following the announcement of the budget last Wednesday, as markets seem concerned about the scale of the extra borrowing. At around 4.460%, UK 10-year GILTS are trading at the highest level so far this year, despite the central bank having cut interest rates in August.
GBP/USD momentum has turned as the currency pair depreciated for a fifth week in a row. The $1.35 level was clearly denied in September, which led to a retracement back to the $1.28 levels. Bulls need to push above $1.30 to find a new neutral level as the base for further advancements. However, this weeks Bank of England meeting, which will likely be accompanied by the second rate cut of the year, will make this difficult. The US election results will determine the fate of the pair in the short term. A Trump win could see GBP/USD push lower to the $1.26 level, while a Harris presidency would anchor the pair above the $1.30 mark.
Dollar lower as election draws nearer
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04-08
All times are in BST
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*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.
