Election Risk and Policy Divergence Shape FX Markets

Monday, November 04, 2024 (Week 44)

This briefing focuses on three currency pairs offering compelling trading opportunities during the upcoming week. GBP/USD presents clear directional potential as the Bank of England signals faster rate cuts while markets process a potential Trump presidency's impact on Federal Reserve policy. AUD/JPY offers volatility opportunities around Tuesday's RBA meeting and continued BOJ policy divergence. EUR/NZD captures the stark contrast between ECB's measured approach and RBNZ's aggressive 50 bps cut, with further policy decisions ahead.

The selection prioritises pairs with strong directional drivers, clear technical levels, and upcoming high-impact events. Adding significance, the US presidential election countdown introduces volatility potential across USD pairs, while central bank meetings for the Fed, BOE, and RBA coming up create specific entry opportunities. Each pair also benefits from deep market liquidity and reasonable spreads during main trading sessions, crucial considerations for position execution.

GBP/USD: Election Risk Amplifies Policy Divergence

The British pound faces dual pressures against the US dollar: BOE Governor Bailey's shift toward aggressive rate cuts and mounting US election uncertainty. Deutsche Bank's analysis suggests asymmetric dollar risks, with limited downside in a divided government scenario but significant upside potential under a Republican sweep.

GBP/USD declined from 1.342 to 1.306 between September 30 and October 4, driven by:

• BOE Governor Bailey's hints at accelerated rate cuts

• Strong US jobs report showing 254,000 jobs added in September

• Trump leading in five of seven key swing states as of October 31st

Additional pressure emerged October 30-31, with GBP/USD falling from 1.304 to 1.284 after:

• Labour's first budget unveiled £40 billion in tax hikes

• Goldman Sachs projecting higher near-term inflation under potential Trump policies

• Polls showing Trump and Harris neck-and-neck

Recent: UK:

• Tue, Oct 30: Labour's first budget presentation

• Wed, Oct 31: UK Manufacturing PMI fell to 49.9

• Thu, Nov 01: Bank of England rate decision

Recent US:

• Thu, Oct 31: Core PCE Price Index data

• Fri, Nov 01: Nonfarm Payrolls (12K vs 113K expected)

• Ongoing: Presidential election polling showing tight race

Upcoming: UK:

• Thu, Nov 07: Bank of England Interest Rate Decision

• Thu, Nov 14: UK GDP Growth Rate QoQ

• Fri, Nov 15: UK Retail Sales MoM

Upcoming US:

• Tue, Nov 05: Presidential Election

• Thu, Nov 07: Fed Interest Rate Decision

• Mon, Nov 11: Fed Bowman Speech

AUD/JPY: Contrasting Policy Approaches Drive Direction

The Australian dollar versus Japanese yen cross rate reflects monetary policy divergence between the RBA and BOJ, with inflation trajectories playing a crucial role in both countries' policy decisions.

Japan:

• Japanese inflation fell to 2.5% in September from 3.0%

• BOJ maintained rates at 0.25% in October meeting

• Japanese consumer confidence declined to 36.2 in October

Australia:

• RBA held cash rate at 4.35%

• Employment surged by 64,100 jobs in September

• Business confidence improved to -2 in September

Upcoming: Japan:

• Wed, Nov 06: BOJ Monetary Policy Meeting Minutes

• Wed, Nov 06: Jibun Bank Services PMI Final

• Fri, Nov 08: Reuters Tankan Index

Upcoming Australia:

• Tue, Nov 05: RBA Interest Rate Decision

• Tue, Nov 05: RBA Press Conference

• Thu, Nov 07: Balance of Trade

EUR/NZD: Policy Divergence Drives Record Gains

EUR/NZD surged between October 22-31, climbing from 1.783 to 1.827 as monetary policy divergence widened between the ECB's measured stance and RBNZ's aggressive easing.

Eurozone:

• Annual inflation rose to 2.0% in October

• GDP expanded 0.4% in Q3 2024

• Manufacturing PMI rose to 45.9 in October

New Zealand:

• RBNZ cut rates 50 bps to 4.75%

• Annual inflation fell to 2.2% in Q3

• Manufacturing PMI improved to 46.9 in September

Key Events

Upcoming New Zealand:

• Tue, Nov 05: RBNZ Financial Stability Report

• Tue, Nov 05: Employment Change QoQ

• Tue, Nov 05: Unemployment Rate

Market Outlook

Currency markets face a pivotal period with the US presidential election potentially reshaping global trade and monetary policy dynamics. ING highlights several key considerations:

Republican Sweep:

• Potential 5% handle for 10-year yields amid aggressive fiscal expansion

• Upward pressure on USD across major pairs

• Increased volatility in trade-sensitive currencies

Split Government:

• Moderate yield increases driven by inflation concerns

• Limited USD movement

• More stable trading conditions

Democratic Victory:

• More contained yield movement

• Lower growth prospects weighing on USD

• Focus on conventional monetary policy transmission

Key Risks

• Election uncertainty with key state margins within 0.5% triggering automatic recounts

• Pennsylvania's final results legally required by November 26th

• Middle East conflict escalation could trigger safe-haven flows

• Multiple central bank decisions may surprise market expectations

• UK fiscal outlook uncertainty following Labour's budget

• Chinese economic data impact on commodity currencies

Sources

Bank of England, Federal Reserve, European Central Bank, Reserve Bank of New Zealand, Bank of Japan, Reserve Bank of Australia, Trading Economics, Statistics New Zealand, Australian Bureau of Statistics, Credit Agricole FX Analysis, Deutsche Bank Currency Projections, ING Market Scenarios, Goldman Sachs Economic Forecasts, FiveThirtyEight Election Data.