FX Market Update: US Dollar Rises Ahead of US Election and Fed Decision

US dollar soars ahead of election

The US dollar index rose for five consecutive weeks, reaching its highest level since July 29 as the focus shifted to the upcoming US general election.

The index, which tracks the performance of the greenback against a basket of currencies, rose to a high of $104.6.

Polls show that the election results will be close, with Kamala Harris having a slight lead against Donald Trump nationally. However, the prediction market is leaning towards Donald Trump.

A Harris win will likely be a sign of the continuation of Joe Biden’s policies, while Trump will likely introduce more policies. The most notable of these will be his trade wars since he has pledged to implement large tariffs on imports.

He has also advocated for a weaker US dollar, a move that will boost exporters. Also, he believes strongly in tax cuts, which will likely widen the country’s deficits.

Therefore, a Trump win could lead to a stronger US dollar as investors move to safe havens in anticipation of more extreme policies.

The US dollar will also react to the upcoming Federal Reserve decision scheduled on Wednesday. Analysts expect the bank to cut interest rates for the second consecutive meeting, especially after the weak jobs numbers released on Friday. Analysts at ING wrote:

An anticipated close election outcome could prompt significant market volatility, but this won’t deter the Fed from cutting interest rates by 25bp. Inflation is less of a worry, and the Fed is putting more focus on a cooling jobs market. In turn, we expect it to continue cutting rates closer to neutral irrespective of which candidate wins.

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Australian dollar slips for five weeks

The Australian dollar has dropped for five consecutive weeks, and is hovering at its lowest point since August 5.

This sell-off happened even after the statistics agency published stronger-than-expected inflation numbers.

According to the Australia Bureau of Statistics (ABS), the headline Consumer Price Index (CPI) retreated from 3.8% to 2.8%, higher than the median estimate of 2.3%.

The trimmed and weighted mean CPI numbers dropped from 3.9% to 3.5% and 4.2% to 3.8%, respectively. These numbers meant that Australia’s inflation is falling, albeit at a slower pace than expected.

Therefore, there is a likelihood that the Reserve Bank of Australia (RBA) will leave interest rates unchanged in its Tuesday meeting. It will then hint that higher rates will remain for a while, making it one of the most hawkish central banks in the developed world today.

British pound reacts to budget and BoE

The British pound continued its downtrend, reaching its lowest level since August 12. This decline also coincided with a retreat in UK government bonds after Rachel Reeves, the Chancellor of the Exchequer released the first Labour Party budget in 14 years.

In it, she unveiled a plan to spend, tax, and borrow more money. Altogether, these tax hikes will raise over £48 billion, funds which will be used to boost investments in the country.

The next important catalyst for the GBP/USD pair will be this week’s Bank of England (BoE) interest rate decision. In it, analysts expect the bank to deliver the second cut this year, a move that will bring rates to 4.75%.

These cuts will help to supercharge an economy that has done better than expected this year. For example, the most recent data showed that the economy expanded in August after contracting in the last two consecutive months.

Swedish krona weakness continues ahead of Riksbank

The Swedish krona has been in a steep downward trend in the past few weeks and is hovering at its lowest level since August.

The USD/SEK has risen by over 7% from its lowest level in September as traders focus on the upcoming Fed and Riksbank decision.

Riksbank, which is the world’s oldest central bank, is expected to continue cutting interest rates in this meeting. Precisely, it will likely deliver another jumbo rate cut of 0.50% since inflation has dropped sharply in the past few months.

Francesco Pesole and James Smith of ING wrote that:

We expect a 50bp rate cut by Sweden’s Riksbank at the 7 November meeting. This is a consensus view that is almost fully priced in by swap markets, but there is a marginal risk that a SEK selloff led by the US election outcome could prompt a more cautious Riksbank cut.

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Brazilian real nears a record low

Meanwhile, the Brazilian real continued its downward trend and is nearing its lowest level on record. The USD/BRL pair has risen to 5.86, a few points below the all-time high of 5.9760, which it reached in 2021.

The pair has soared because of the falling commodity prices, with corn and soybeans dropping by double-digits from their highest levels since 2021. Brazil’s currency often do well when agricultural commodities are in an uptrend.

The next key event that will move the Brazilian real will be the central bank’s decision, scheduled on November 6. Like other central banks, analysts expect that it will continue cutting rates to boost the economy.