EUR/USD: The nightmare is that the US results of the elections are contested

The second wave of coronavirus is locking the euro to the downside – but traders have little time to consider the implications of the virus as the all-important US elections are set to rock markets. The four different scenarios provide unique paths for the EUR/USD pair, with high-volatility outcomes looking more likely, Yohay Elam, an Analyst at FXStreet, reports.

Key quotes

“According to FiveThirtyEight, Biden has an 88% chance of becoming America's 46th president. In such a scenario, Dems would also win the Senate and the House, allowing them full control of the government. They could swiftly pass a generous stimulus bill, either worth around $2 trillion like they were close to signing off with the GOP, or even $3.4 trillion they originally passed in May. In both scenarios, there is a significant downside for the dollar and upside for EUR/USD. It would also provide relief from the other scenarios that markets fear.”

“The battle for the Senate is considerably closer than the presidency. According to FiveThirtyEight, the center-left party has a 74% chance of flipping the upper chamber, close to what the site gave Hillary Clinton back in 2016. With several tight races, there is room for the GOP to cling onto the Senate. In opposition, the Republicans could play hardball and refuse to pass a meaningful package, compromising on $1 trillion they suggested in September or even lower. Moreover, the stalemate in Congress would also weigh on markets. EUR/USD has room to fall on concerns that the world's largest economy is not doing enough to rise from the crisis – nor lift the rest of the world.”

“In case Trump pulls off another electoral college victory, Republicans are also likely to cling onto the Senate. While Majority Leader Mitch McConnel and his colleagues were reluctant to support the president's efforts before the elections, a fresh mandate could empower Trump to push for a larger package. In this case, EUR/USD would move higher, albeit not massively.”

“The scenario of a contested election is far from theoretical as Trump refused to commit to accepting the results. Who makes the final ruling on rejected ballots, how long the count lasts or calling a recount? These are some of the questions possible in one state. Legal battles could erupt over additional issues in other states as well. Moreover, both Trump and Biden could claim victory. Eventually, Americans will agree on an outcome, but a protracted process – and potential violence on the streets – could be detrimental to markets. The safe-haven dollar could surge, sinking EUR/USD.”