The Onset of US Election Volatility Begins

Impact on GBP: Renewed market calm causing GBP to steady

Friday’s session hinted at restored stability in the gilt market, moving GBP/EUR to €1.1900. Although gilt yields may gradually rise due to increased borrowing expectations, a repeat of the post-2022 mini-budget crisis seems unlikely.

This Thursday, the Bank of England is expected to cut rates by 25bp. Markets are keen on the MPC's response to last week’s budget, which the Office for Budget Responsibility views as pro-growth and inflationary. Governor Bailey, however, may emphasise declining services inflation, signalling a dovish stance on rates. A dovish shift could pressure the Pound, though potential inflows into Sterling from lower gilt yields might offer some support.

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Impact on EUR: Gaining momentum on a softer Dollar

EUR/USD rebounded this morning after Friday’s volatility around US payrolls data. This week’s focus will shift almost entirely to the US election, with minimal influence from the Eurozone calendar.

The US election impacts the Euro not only through Dollar movements; a Trump win could prompt the European Central Bank to consider a larger 50bp rate cut in December, driven by protectionism risks. Currently, markets are pricing in 29bp of easing in December and another 30bp in January, indicating some expectation for a significant cut.

EUR/USD briefly rose above $1.0900 amid broad USD weakness, although the pair appears overvalued given persistent rate differentials.

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Impact on USD: Election week spurs Dollar Volatility amid shifting polls

US election week begins with a broadly weaker Dollar, influenced by soft payrolls data and polling shifts that favour Democrats in key states. Average polls show Trump with narrow leads in most swing states, but Democrats are gaining ground, adding to uncertainty. Voting begins tomorrow, and results from swing states may not be finalised immediately, which could prolong market volatility.

If Harris wins, a Dollar selloff is expected, while a Trump win may have mixed effects depending on Congress's composition. A Republican sweep could boost the Dollar, while a split outcome might limit its rally.

The Federal Reserve’s rate decision on Thursday may be overshadowed by election volatility, with a 25bp cut likely regardless of the results. Expect volatility in USD pairs through early election results and potential position adjustments. Today’s momentum leans towards a weaker Dollar, though intraday shifts are possible.

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