How The 2024 Elections Will Impact The Forex Industry
The 2024 US presidential elections are due on November 5 this year. Initially, it was set to be a race between Trump and Joe Biden. However, things changed after the first debate, and now Trump will face Kamala Harris. The election might increase volatility in the forex industry because of uncertainty before the winner is announced.
History has shown that the tighter the race to the top seat, the more volatile the forex market. In a tight race, every vote counts and creates uncertainty. On the other hand, if it is clear who will win, there is less volatility.
A new president comes with new fiscal and economic policies that could significantly impact the US dollar. Therefore, the slightest changes will cause volatility before the winner is announced.
How Elections Impact Forex Markets
Elections can significantly impact prices, as we will see below. In the past, US elections have caused considerable volatility in the forex markets.
The 2016 presidential election was tight, but polls favored Democrats. Most people were caught off guard when Trump won the election.
EUR/USD 2016 Trump win
On election day, price action in the EUR/USD pair suddenly jumped before prices closed on a strong bearish candle. The large wick is a sign of uncertainty before markets settle on a direction. The uncertainty came before and right after the winner was announced.
However, when investors had time to reflect on what a Trump win would mean, the price fell as the dollar rallied. Trump would increase taxes for importers while lowering taxes to encourage businesses in the country.
The Fed would have to work harder to keep inflation in check. Therefore, interest rates would increase.
Higher import costs increase demand for domestic goods and services, raising inflation and interest rates and boosting the dollar.
Gold 2016 Trump win
Conversely, higher interest rates would reduce the appeal of non-yielding gold. As a result, the yellow metal closed well below its highs.
2024 Presidential Election
Trump will face Kamal Harris this year after Joe Biden dropped out of the race. The 2024 election also presents similar outlooks. Kamala Harris might continue with the current policies because she is part of the current administration. When the new president was part of the previous administration, they will likely keep most of the policies unchanged.
On the other hand, a Trump win would lead to policy changes that could impact the forex market. More tariffs and tax cuts for businesses could boost the dollar.
Factors Affecting Forex Markets During Elections
Elections bring many changes to political stability and economic policies. Furthermore, investor sentiment and volatility cause price fluctuations.
Investor Sentiment And Risk Appetite
Investors' sentiment and risk appetite are other factors that affect prices in election season. Notably, the Trump win in 2016 increased risk appetite, as seen in the rally in equities. In the forex market, it was evident in how gold prices declined. The yellow metal is considered a haven. However, when risk appetite grows, it suffers.
Gold 2020 Biden win
Meanwhile, in 2020, when Trump lost, gold prices fluctuated but closed well above lows. Moreover, prices rallied the next day, indicating investors were more comfortable buying the safe-haven metal than riskier assets.
When more people are buying gold, it is a sign of uncertainty about the next administration.
Economic Policy Changes
A new president can change the economic scene in the US. Therefore, traders try to anticipate some of these changes and their impact on markets. If a president threatens the nation's political stability, money will flow out of the economy as investors seek safer conditions for investing.
Meanwhile, economic policies like increased tariffs and tax cuts boost businesses and the dollar in the long run. That is why the dollar rose when Trump won in 2016 and fell when Trump later lost in 2020.
EUR/USD 2020 Biden win
A chart of EUR/USD shows fluctuation before the price closed well above its lows after the 2020 election. When Biden won, it became clear that some of Trump's economic policies would change. As a result, the dollar fell.
Possible Outcomes Of The 2024 Elections
The 2024 elections could have the same effects as past elections. A battle between Kamala and Trump could either see a continuation of most current policies or a significant change. A Kamala win would likely mean most of Biden's policies would continue with only a few changes.
The US central bank would continue cutting interest rates, weakening the dollar. The Joe Biden administration has tried to allow the central bank to achieve its goals of low inflation. However, analysts expect the opposite from a Trump administration.
Therefore, a Republican win might cause more volatility in the forex markets. It could also lead to a rally in the dollar and a drop in gold prices.
If Trump won, he would come with policies that would increase import costs, inflation, and interest rates. This would present a challenge for the Fed, likely leading to a pause in rate cuts. On the other hand, Democrats are more willing to let the Fed do its current job of lowering borrowing costs.
Forex Trading Strategies During Election Periods
Election periods come with increased volatility and uncertainty. Therefore, it is essential to manage risk properly.
Studying News And Polls
Dominion Options RSI
During election periods, it is essential to monitor investor sentiment before, during, and after the voting. Several technical indicators show sentiment and whether traders lean on the bearish or bullish side. A good example is the Relative Strength Index. Moreover, you can use the sentiment tool on Dominion Options' cTrader platform.
Dominion Options news
On the fundamental side, traders should monitor news and polls before the elections to see the likelihood of a Democrat or Republican winning. This helps to speculate the direction of the market.
Stop Loss Orders And Hedging
Traders can reduce risk by using advanced stop-loss orders to limit potential losses. Moreover, calculating favorable risk-reward ratios ensures you make more than you lose when you win. At the same time, when you lose, the impact on your capital is smaller.
Another technique is to hedge by simultaneously trading two related assets. This way, when one asset goes down, there is a high chance the other will rise, reducing your losses.
Diversification
Another strategy during election periods is diversification. Instead of putting all your eggs in one basket, it's better to spread them out. Traders can decide to take positions across different assets like currencies and metals to reduce their exposure to one asset class.
Join Dominion Options today and use the best available tools to trade the 2024 US presidential elections. You'll also gain access to investor sentiment tools and news, keeping you updated on the election scene.
