US election: China and the Dollar take centre stage

The US Election Day is on November 5. The race between former Republican President Donald Trump and Democratic Vice President Kamala Harris is remarkably tight in key swing states. Investors are watching closely, worried that a contested result could disrupt global markets and heighten geopolitical tensions.

Donald Trump: Is Captain Tariffs back?

Trump’s platform emphasises bold shifts in economic policy. He proposes removing taxes on tips and Social Security benefits, slashing corporate taxes, and radically restructuring trade policies—all aimed, he claims, at bringing jobs back to American shores and curbing inflation. For many Americans still feeling the sting of rising prices, these promises resonate.

One of Trump’s major proposals is a sweeping tariff plan. He aims to introduce a universal tariff of 10% to 20% on all imports, with potential tariffs reaching up to 60% on Chinese goods. Reflecting on his previous term, during which he imposed 25% tariffs on steel and 10% on aluminium, citing national security, Trump’s new tariffs would go much further. The original tariffs led to retaliatory measures from Canada and the European Union (EU), which imposed their own tariffs on US agricultural goods, affecting American farmers.

Economists worry that such broad tariffs could trigger a new cycle of trade conflicts, driving up prices and straining both US and global economies. Experts warn that a heavy tariff strategy might prompt a stock market downturn, especially for large American companies reliant on global supply chains. UBS, for instance, predicts that a 10% tariff could cause the US stock market to contract by a similar margin.

Additionally, a report by the Peterson Institute for International Economics estimates that if Trump’s tariffs are enacted, inflation could climb to between 6% and 9.3% by 2026, compared to a projected 1.9% without them.

On top of these proposals, Trump has expressed a desire to exert more influence over the Federal Reserve (Fed). He was critical of the Fed’s interest rate hikes during his first term, suggesting that a more lenient monetary approach would help curb inflation (any similarity with Turkey's President Recep Tayyip Erdogan’s awkward view of how rates impact prices is purely coincidental). However, many economists caution that undermining the Fed’s independence could have serious long-term effects on economic stability.

Kamala Harris: The middle class’s champion?

Kamala Harris’s campaign centres on tackling rising costs and creating fairer economic opportunities. Her proposals aim at making housing more affordable, lowering healthcare expenses and revisiting Donald Trump’s tax cuts, which economists argue largely benefit corporations and high-income individuals.

Harris positions herself as a capitalist who believes in a balanced partnership between government and the private sector. Still, some economists express concerns that her policies could lead to disruptions in the labour market and uncertainty for businesses. Additionally, there’s a risk that her focus on stimulating demand might drive up prices faster than supply can adjust, potentially worsening inflationary pressures.

On trade, Harris has yet to detail her stance on tariffs. However, she has voiced a commitment to safeguarding domestic industries from foreign competition.

Looking ahead, the future of US-China relations will be at the centre of the debate following the outcome of the US election.

If Kamala Harris takes the White House, we’re likely to see a continuation of steady support for Taiwan.

On the other hand, if Donald Trump wins we could see a much more confrontational stance. Another round of US-China trade tensions is likely, which would not only hit Chinese growth but could also disrupt the global economy and contribute to rise inflation in the US.

So far, according to the New York Times, Harris is leading the race to the White House by 49% vs. 48% from Trump. However, this scenario is largely expected to keep shifting in either direction in the next few days.

What about the US Dollar?

The US Dollar experienced a marked retracement during the 2017–2021 Trump administration. In fact, the Greenback dropped at quite a sustained pace from the beginning of 2017 until Q1 2018, just to embark on a consolidative phase afterward and resume its decline around June 2020, in line with the global worsening conditions following the outbreak of the COVID pandemic.

It seems vox populi that a Trump win will greatly benefit the US Dollar this time. In fact, one of the key drivers behind the intense rally in the Greenback in place since early October is precisely the emergence of the so-called “Trump trade”. It is worth noting that the US Dollar Index (DXY), which tracks the Dollar against a basket of six competitors, rose more than 4% during that period, maintaining the risk-associated universe under significant downside pressure.

The immediate threat for the US Dollar comes from the likelihood of a “blue wave” outcome in the November 5 election. Under those circumstances, the Greenback is expected to suffer the unwind of the “Trump trade”, as well as positioning shifting to a more bearish stance, while prospects of higher taxes and increased regulation are likely to hurt the sentiment surrounding US stocks.

As the Euro (EUR) represents the largest share of the US Dollar Index (DXY), it is worth attempting to assess how the US election could impact EUR/USD.

Since April, EUR/USD has been gradually climbing on the back of investors’ repricing of, back to the day, around three to four interest rate cuts by the Federal Reserve (Fed) this year. That said, the march north in the pair has been posting higher lows until it hit the 2024 peak in the 1.1210-1.1215 band in late September, also underpinned by the somewhat hawkish stance from many ECB rate setters, who maintained a cautious approach to the bank’s easing cycle, particularly in the wake of the hawkish cut on September 12.

However, the combination of a more prudent stance from Chair Jerome Powell following the Fed’s jumbo rate cut on September 18, the less dovish Fedspeak since then, and the strong resilience of the US economy, all gave a massive dose of oxygen to the US Dollar along with speculation that the economy could not even attempt to land at all.

US yields, especially on the belly and the long end of the curve, have also been lending support to the Greenback this month, mirroring the currency’s strong leg higher.

And so, EUR/USD went down. And deeper down it went until some support appears to have emerged around 1.0760. That is a lot more than four cents since tops recorded just four weeks ago.

The stagnant economy in Germany and, by proxy, in the broader Euroland does not offer support for the single currency in the short or medium terms when compared with the robustness of the US activity. This is another reason why the US Dollar is seen outperforming its European peer, and this should come regardless of who becomes the 47^th US President in November.

A glance at EUR/USD techs

The resumption of the selling bias should immediately challenge the October low at 1.0760 (October 23). Once the pair clears this region, the next support comes at the June low of 1.0666 (June 26), prior to the Fibo extension of the September-October pullback at 1.0639, a region bolstered by the May low of 1.0649 (May 1). Down from here aligns the YTD low of 1.0601 (April 16), ahead of another Fibo extension at 1.0575.

All in all, while below the critical 200-day SMA at 1.0869, the outlook for EUR/USD should remain negative, leaving the door open to extra losses.