Key takeaways

• The USD typically strengthens in the run-up to US elections.
• Among the four possible outcomes, clean sweep outcomes are likely to offer greater scope for USD strength to persist.
• But it would be a mistake to extrapolate the initial reaction into 2025, as others factors, like Fed policy, may be more dominant.

The FX market likes to distil issues, such as the 5 November US elections, into a simple binary outcome, but this would be a mistake. The complexity is not only a function of the result being too close to call, but also the result of there being numerous implications, impacting fiscal, trade, and monetary policy, among other aspects. In addition, the impact may vary over time. Historically, the USD has fared well in the run-up to US elections, likely reflecting the “safe haven” allure amid heightened political uncertainty. That is likely to be true over the coming weeks. Once the result is known, we will see the next response in the FX market (we run through four possible outcomes below), perhaps persisting for days, weeks, or months. But it would be a mistake to assume that he post-result reaction will continue to set the tone into 2025. There are plenty of ways in which the FX market could stall or reverse that initial move, for example, if actual policy outcomes fail to match expectations, or if other factors supersede political forces as the key FX drivers.

A Republican clean sweep: The USD is likely to rally sharply if there are signs of future fiscal stimulus that would temper market expectations for the Federal Reserve (Fed) easing in 2025. The likelihood of higher trade tariffs would also support the USD, particularly if they feed inflation expectations and further temper pricing for Fed rate cuts. Potential corporate tax cuts and deregulation expectations might draw investment flows into USD assets. Nevertheless, the USD could face headwinds, including concerns that the Republican Party would talk down the USD or call for lower US interest rates. Rising risk appetite might also temper the “safe haven” USD. But we would expect bullish USD forces to win out initially. Nonetheless, a USD rally would have its limits entering 2025, as it would not be guaranteed that actual delivery of policy would fully match those expected by markets.

A Republican presidency, divided government: The initial USD reaction is still likely to be bullish, with markets likely to anticipate higher trade tariffs (and perhaps inflation), and a more business-friendly regulatory backdrop. But the USD would not benefit from the fiscal easing expectations that a clean sweep would have brought. A divided Congress could foster a more fractious debate regarding tax cuts expiring in 2025, which could create a “fiscal cliff” mood in markets. Most likely, however, Fed policy would return as the dominant USD driver in 2025, amid fiscal gridlocks. We believe a modest initial post-election USD rally could extend into 2025.

A Democrat clean sweep: This outcome could point to a sling-shot path for the USD. The initial post-election reaction is likely to be USD negative, as markets price out the potentially USD-positive aspects that a Republican presidency might have fostered. But that reflex would be unlikely to set the tone for the USD into 2025. A clean sweep could still belatedly foster market expectations for USD-positive fiscal stimulus, albeit with different elements to a Republican clean sweep. This could temper market expectations for the pace of Fed easing in 2025, with attendant USD upside. Any initial USD-negative reaction in November could reverse in 2025.

A Democrat presidency, divided government: On paper, the ultimate status-quo outcome, but one which could see some initial USD weakness, amid adjusting to price out fiscal stimulus expectations. This scenario should not carry lasting implications for the USD, but other drivers, such as Fed policy and the pace of easing elsewhere, would likely be more dominant.

https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-14/