The Trump-Harris showdown begins: Voters in the US will go to the polls on 5 November to elect their next president. Will America get its first ever woman president or a second Donald Trump term? The election volatility brings a wave of both opportunities and challenges. Market participants are closely monitoring how it might impact both short-term and long-term trends.
The 2024 US election is a tightly contested one, with two candidates, Kamala Harris and Donald Trump, each having unique approaches to economic policy.
Source: NY Times (As of 3 November 2024)
The result of this election will undoubtedly have implications for traders. Here, we explore how both the short-term volatility and the longer-term policies may affect market dynamics.
Leading up to the election, market volatility is likely to spike due to the uncertainty surrounding the outcome. A tightly contested election can cause hesitation in the markets, particularly if the results are delayed or there are recounts in swing states. This uncertainty tends to lead to heightened short-term volatility, which is both an opportunity and a risk for different types of traders.
For day traders, this environment of short-term swings could be beneficial for seizing quick opportunities. On the other hand, longer-term traders may find themselves in a riskier position, with markets reacting suddenly to polling news or to disputes over election outcomes. The extended uncertainty could weigh on financial sentiment until January 2025, when the new president officially assumes office.
If Kamala Harris were to win the election, market participants may anticipate a sense of stability as her administration would be viewed as a continuation of the Biden presidency. Historically, incumbent administrations have provided a more predictable environment, leading to smoother market transitions. Traders might expect less turmoil in reaction to the election results due to the familiarity with ongoing policies and existing economic plans.
On the contrary, a return of Donald Trump to the presidency could foster an environment of uncertainty. A new administration typically takes time to get up to speed, and traders may need to wait for new policies to be communicated and implemented before gauging their full impact. This scenario is more likely to trigger short-term volatility as the markets react to unknowns.
Looking beyond immediate market reactions, the long-term effects of the US election are tied closely to each candidate’s economic policies.
Kamala Harris: Harris’s potential continuation of Biden’s administration is likely to bring regulatory policies that affect financial markets. Her focus on social spending may increase national debt, putting downward pressure on the dollar, while potentially triggering inflation. Rising inflation could prompt the Federal Reserve to raise interest rates, which could then strengthen the dollar in the medium term.
Donald Trump: The 2016 Trump administration had a strong pro-business stance, focusing on deregulation and tax cuts, which initially strengthened the dollar. However, his position on fiscal stimulus could increase national debt, thereby weighing on the currency. Additionally, Trump’s unpredictable approach to foreign policy could lead to geopolitical instability, with potential consequences for the US dollar.
Source: Reuters
Both candidates have policies that could have a contrasting effect on the dollar. Fiscal stimulus and regulatory measures could simultaneously impact the value of the dollar, pushing it either higher or lower depending on how effectively policies are implemented and received by the market.
Given the current environment, traders need to stay adaptable. Monitoring polling data, understanding the incoming administration’s economic plans, and watching the market’s response to breaking news are essential strategies. The Federal Reserve’s response to inflation—influenced by policies on spending, regulation, and commodity prices like oil—will be an important focus for traders, especially those with positions in US dollar pairs.
Short-term opportunities might emerge as market volatility spikes in response to evolving headlines, but understanding the long-term direction will require a careful assessment of policy impacts, especially around fiscal discipline and regulatory actions. We recommend paying attention to any shifts in the dollar’s trajectory due to changes in fiscal and monetary policy, as these will be key indicators in the months following the election.
For more insights, read this article on how you can manage market volatility in the US elections.
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