US Elections: Contested outcome to trigger a USD rally – CE

Over recent weeks, equities have rallied and bond yields have risen on occasions when the perceived chance of a Democratic win has gone up, and vice versa. As the election campaign draws to a close, economists at Capital Economics looks at how it has affected so far and assesses how different outcomes could affect equity, bond and currency markets after Election Day. 

Key quotes

“A win for their candidate for president, Joe Biden, combined with a ‘Blue wave’ sweep where Democrats won majorities in both the House of Representatives and the Senate, is perceived as the outcome that would deliver the largest fiscal boost and therefore the most help for risky assets.”

“Investors may be overly optimistic about how much stimulus a Biden administration would deliver, and how quickly it would get through Congress even with Democratic majorities in both houses. We also think that any further rise in US Treasury yields, if there was a large fiscal package, would not be sustained. We expect that the Fed will continue to keep yields low regardless because it wants financial conditions to remain accommodative while the economy recovers from the COVID-19 shock.”

“A surprise sweep for Republicans (which looks very unlikely) could well lead to a broadly similar market reaction as a Democratic win. They too would probably pass another stimulus package, albeit a smaller one, and continue with the generally business-friendly policies of the past four years. That said, a second term for President Trump would probably be bad news for some emerging market currencies – in particular, the Chinese renminbi – due to the risk that he may again ratchet up trade tensions again.”

“If the election results in divided government, that may weigh on US equities and bond yields since investors would probably pare back their expectations for further fiscal stimulus. As the experience this year shows, divisions between the two parties would probably lead to continued deadlock in Congress.”

“The worst outcome for investors would be if either side contested the outcome of the election. That would reduce the near-term prospects for a fiscal deal and increase uncertainty more generally. It could easily trigger a deeper setback for risky assets and a rally in safe havens, including the US dollar.”


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Feed news

Latest Forex News

Latest Forex News

Editors’ Picks

AUD/USD: Fizzles upside momentum below 0.7400 but bears await clear signals

AUD/USD eases after refreshing the three-month top the previous day, downside have recently been confined though. Chatters surrounding US-China relations, virus woes probe risk-on but absence of the US traders, light calendar elsewhere, limits the moves.


EURUSD stabilises above 1.1900 awaiting further drivers

EUR/USD was at the whim of US dollar flows on Thursday, but ultimately ended the day flat at just above 1.1800. ECB rhetoric, as well as the minutes of the November meeting, serve as a reminder of the stimulus dilemma faced by the ECB in December.


Gold: Consolidation at critical weekly lows, bears looking for a discount

The price of gold has been on the back foot this week, breaking below the psychological $1,850s area, plummeting to a fresh weekly low of $1,800.40.

Gold news

WTI regains $45.00 even as choppy session limits the moves

WTI fades pullback moves from the highest in nine months. The energy benchmark eased from the multi-day high the previous day as global optimism, mainly fuelled through the coronavirus (COVID-19) vaccine hopes, fizzled. Also challenging the oil bulls was the US holiday due to Thanksgiving Day.

Oil News

Black Friday 2020 Discounts!

Learn to trade with the best! Don't miss the most experienced traders and speakers in FXStreet Premium webinars. Also if you are a Premium member you can get real-time FXS Signals and receive daily market analysis with the best forex insights!

More info