Market Report - 05/11/2024
Investors brace for US election ; Markets await BoE rate decision
Today marks the day that the US Presidential election finally takes place, after months of campaigning from both candidates; the Republican nominee and former president Donald Trump and the Democratic nominee Kamala Harris.
Attempting to call the winner is considered extremely difficult given the perceived deadlock in the polls so far and now the betting market. Originally, betting markets displayed a Donald Trump lead through October, though this has now been reduced in the days leading up to the election day. This heated race is expected to go right to the wire and could come down to results from seven swing states; Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin.
Last night saw both candidates hold their final rallies, with Vice President Kamala Harris ending her campaign in Philadelphia and Donald Trump wrapping up in Michigan. Despite the excitement in the race to the White House, investors will be bracing themselves for uncertainty. Already market volatility has picked up over the recent days as the market tries to predict the outcome of the Presidential election and how congressional elections conclude.
With polls being so incredibly tight, there are some suggestions that the result will not be clear for several days. For investors, this uncertainty will likely hang over financial market behaviour, tending to favour 'safe haven' assets such as the U.S. Dollar, Yen and Swiss Franc while weighing on stock markets and 'high beta' currencies such as the Australian Dollar.
The US dollar closed the day by dipping to a two-week low, after a poll showed Kamala Harris with a surprise three-point lead over Donald Trump in Iowa, which ties in with some economist’s suggestions that a Trump victory could strengthen the Greenback whilst a Harris victory may be neutral, or a softer US dollar.
This morning, the first results are already in; with the race to the White House continuing to display a race that is very much neck and neck. Both candidates have won 3 votes each in a small town called Dixville Notch in New Hampshire, where the election results traditionally kick off.
Looking forward to this evening as the early results begin to come in, there are some suggestions that GBPUSD could drop below 1.30 once again if the signs are that Donald Trump could be in the lead. This would be expected to accelerate if the momentum continues in the former Presidents favour, with suggestions from some economists that a victory for Trump could lead to “a stronger dollar” and “higher government bond yields”. This would be potentially due to of his plans to raise tariffs sharply. There are some suggestions that these policies could in-turn boost inflation and reduce the willingness of the Fed to continue reducing interest rates.
If the early results show continued momentum for Vice President Harris, as they have done in the betting market in the past few days, then expectations in the market are that we could see the Dollar begin to weaken. This slide could accelerate if Harris seemingly further cements her lead.
Moving onto the UK, the Bank of England is set to release their next monetary policy decision at 12pm on Thursday. Forecasts are suggesting that the BoE are expected to cut interest rates this week, despite forecasts that Labour’s autumn Budget could lead to higher inflation over the coming year. This would be the second cut this year from the MPC who are focusing on a longer-term plan to slow inflation. A cut of the bank rate by 25bps to will take the interest rate to 4.75% which is now sat at a 90% probability.
The driving force behind this expectation follows last month’s inflation figures where the headline rate dropped to 1.7% year-on-year, which is its lowest level since April 2021. Service sector inflation also fell, which as a result has boosted the thought that the MPC will vote for a second consecutive cut for the first time in four years.
The current base rate sits at 5% after consecutive hikes over the last 24 months, in an attempt to bring inflation back down to the bank’s 2% target. Meanwhile, the most recent figures for wage growth (announced last week) show it also slowed to its lowest level in two years, with average regular earnings growth easing back to 4.9% in the three months to July.
Governor Andrew Bailey and the other MPC members met in the week after Chancellor Rachel Reeves delivered the first Labour budget in 15 years where she announced almost £70bn of extra annual spending. This spending has been largely funded by business-focused tax hikes and additional borrowing.
The Office for Budget Responsibility (OBR) said the sharp increase in spending will contribute to higher inflation, although it will also help drive stronger economic growth. Inflation is forecast to average 2.5% this year and 2.6% next year before coming down, assuming “the Bank of England responds” to help bring it to the target rate, said the OBR.
The expected reaction of the FX markets to this key risk event is pro-longed volatility, which will add more fuel to the fire following the US election, FOMC meeting and the ECB rate decision which are all set to be released this week as well. The GBP is widely expected to be at risk of a devaluation if the BoE opt to cut rates by a further 25bps; especially if they are to provide forward guidance that points towards a succession of further rate cuts in 2025.
Lastly, the EUR, which has found some support over the last 3-weeks following 2-months of constant devaluation could be due some volatility after the ECB took a hawkish tone during recent speeches.