As November 3 Approaches What Happens to the USD/GBP?
Over the past 4 years, the GBP/USD currency pair has endured tumultuous times. What with Brexit concerns sending the GBP plummeting ahead of the US presidential elections, the major concern affecting currency traders was how Britain's exit from the European Union was going to impact overall economic activity in the United Kingdom.
Several points are worthy of mention:
What Factors Impact The GBP/USD?
Uncertainty and volatility go hand in hand. The current performance of US financial markets tends to support the incumbent, President Donald J. Trump. His pro-business policies have helped to shore up the most successful run of form in the stock markets the US has seen in decades.
True to form, the current performance of the market is built in part by previous administrations which laid the groundwork for the Trump bull run on Wall Street. That the Dow Jones, NASDAQ, S&P 500, and other markets have reached and breached all-time highs is no coincidence. It is the sum total of the collective efforts of Trump, fiscal and monetary policy that has paved the way for an incredible run.
The USD, as the world's reserve currency has performed extraordinarily well, helping to boost receipts via exports, and make imports more affordable. A measure of the USD in terms of other currencies – the US dollar index tends to support this.
The DXY has a 52 week range of 91.75 on the low end and 102.99 on the high end. For the year-to-date, the DXY has weakened and is currently hovering around 93.45 (September 8, 2020), reflecting weaker demand for the USD, amid mass selloffs of tech stocks on the NASDAQ.
Uncertainty fuels dollars selloffs, particularly when the US is ground zero for the volatility. Proof of this is reflected in the high levels of demand for gold futures, gold ETFs, and gold stocks. A hedge against uncertainty, gold tends to flourish when markets tend to flounder.
Will a Transatlantic Trade Deal Help the GBP/USD pair?
The GBP/USD pair, like any currency pair, is affected by a number of factors. These include the trade balance, FDI (foreign direct investment), rational partisan theory for Republican or Democrat presidents, and the like.
It is worth pointing out that studies tend to support the notion that Republican leadership in the White House results in a GBP/USD currency pair which averages approximately 10% more (£0.5600), compared to Democratic leadership in the White House (£0.5159).
We can conclude from exhaustive analysis, that Forex trading of the GBP/USD will be impacted positively from a Republican victory, and negatively from a Democratic victory.
However, there is no rule that allows this to extrapolate beyond past occurrences to fit the present election. It is certainly plausible that the theory will hold this time around too.
Indeed, UK Prime Minister Boris Johnson and US President Donald J. Trump will likely hammer out a Transatlantic Trade Deal with one another now that Britain is free from the constraints of the EU.
Trump will want to see that happen, and that will likely deliver positive returns for traders of the GBP/USD pair. Whether it will make the dollar stronger or the pound stronger remains to be seen.
As election day nears, GBP/USD traders can expect much more volatility to affect the currency pair. This will likely be characterized by smaller price fluctuations, as the push/pull effect impacts the markets.
Fortunately, currency traders don't need to stare deeply into a crystal ball to gauge the impact on trading activity. Red states and blue states ultimately determine who will be the next president of the United States. Each state has been assigned a certain number of electoral votes. Majority wins.
If the incumbent is able to win a majority of the rustbelt states in swing states, and others including Illinois, Wisconsin, Pennsylvania, Nevada, New Mexico, Colorado, and Florida, it is possible that a Trump victory will ensue.
The 2020 elections are occurring at an unprecedented time in the world’s history. For one thing, the pandemic will have an impact on in-person voting, and make mail-in/absentee ballots much more telling. We already know that Democrats have a major advantage over Republicans in this regard.
It is likely that the election will not be determined on November 3, 2020. Results may not be available for days, weeks, or possibly longer after the election, given the hard-fought nature of this particular campaign. Joe Biden is worlds apart in terms of policy differences to Donald Trump.
Whatever the electorate decides will have an major impact on the future of the country, from a center-right approach to the likely far left approach of Biden as he is heavily influenced by the likes of Bernie Sanders, Elizabeth Warren, AOC, and the squad.
Come what may, we will not see much movement on the needle until much closer to the election cycle.
We are within 2 months of the US presidential elections, and we can expect a Republican victory to bode well for business and the financial markets, while a Democratic victory will serve to constrain overall economic activity with higher taxes and more bureaucracy, leading to a weakening of overall trading activity.
Watch the debates, and gauge each candidate’s performance on the big issues. That will certainly move the needle on the GBP/USD pair.
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