Dollar Weakness on Harris Momentum, Election Week Uncertainty Looms
As we enter US election week, the USD has started with a softer tone, reflecting recent shifts in polling data that suggest a potential swing towards Democratic candidate Kamala Harris in critical battleground states. This follows last week’s weak payrolls data, weighed down by recent hurricanes and disruptions in the labour market, which have already placed pressure on USD sentiment.
The latest polls reveal a complex and highly contested race. A recent Des Moines Register/Mediacom poll shows Harris leading Trump in Iowa by 47% to 44%, a notable shift in a state Trump carried in both 2016 and 2020. Additionally, PredictIt odds have tilted in Harris’s favour over the weekend. In other key battlegrounds, the NYT/Siena final polls indicate a deadlocked race in six of seven states, with Harris holding slight leads in Nevada, North Carolina, and Wisconsin. Trump holds a narrow lead in Arizona, while Pennsylvania and Michigan remain tied. These developments place Harris just shy of the necessary 270 electoral votes if she can secure Michigan, Wisconsin, and Pennsylvania, putting her path to victory within striking distance. Meanwhile, the Nate Silver model shows Harris at 270 vs. Trump’s 267, further underscoring the tight race.
From a market perspective, the resurgence in Harris’s polling performance appears to be fueling some unwinding of “Trump trades,” with investors positioning for a potential shift in US trade and economic policies under a Democratic administration. Should Harris secure a decisive lead, ING put forward that we would likely see continued USD selling pressure, especially in pairs like EURUSD and GBPUSD, as markets anticipate potential changes in fiscal and trade policies.
Despite this initial USD weakness, it’s essential to note that asset markets are not fully discounting a Harris victory. Many investors are still pricing in the possibility of a Trump win, especially given the tight margins in key states. However, if Harris does pull ahead decisively, especially in states that have been GOP strongholds, we could see a sharper move down in the dollar. On the other hand, a Trump victory, particularly with Republican control of Congress, could buoy the USD due to anticipated continuity in tax and trade policies. The dollar may also see additional gains if market participants hedge against protectionist stances, which would benefit the USD in risk-off flows.
Adding another layer of complexity this week, the Federal Reserve will announce its rate decision. The market currently expects a 25bp rate cut, regardless of the election outcome. However, with the potential for delayed election results due to high mail-in ballot volumes, the FOMC’s impact on the dollar may be muted. Typically, a Fed rate cut would weigh on the USD, but with the election’s uncertain outcome hanging over the markets, this move may have limited short-term FX implications until the electoral dust settles.
Looking ahead, expect significant USD volatility across major pairs, especially as liquidity tightens and investors reassess hedging positions in light of the latest polling sentiment. While the immediate momentum appears to favour a weaker dollar, the situation remains fluid, with potential for rapid reversals. As a base case, we maintain a cautious outlook on the USD today and into tomorrow, with a potential strengthening bias should new developments favor a Trump win or if polling volatility continues to weigh on market sentiment.