Who do you think will win the US election?
Why will he/she win?
While all presidential elections matter, this one matters more than most given the polarising nature of both candidates and some of the protectionist policies advocated by both. It would appear that Hillary Clinton is the ‘least-worst’ option and for that reason I would expect her to win. There is one important caveat to that – a low turnout could favour Donald Trump, which means we could get a surprise given that a lot of Americans won’t vote for either candidate.
Will the US election stem sterling’s declines?
The pound has had what can only be described as a difficult last two years, its slow decline against the US dollar in particular making headline news as it pushes back to levels last seen in the mid-1980s, on concerns over the impact that the upcoming Brexit negotiations might have on UK assets. We’ve already seen the pound’s weakness signal a rebound in UK-denominated assets, with the FTSE 250 making new record highs, with the FTSE 100 not too far behind it. While a lot of the pound’s recent weakness has been put down to uncertainty in the aftermath of the Brexit vote, it hasn’t been helped by an overreaction by the Bank of England in terms of recent monetary stimulus measures, at its recent August meeting.
The strength of the US dollar has been a factor in sterling’s decline, as investors gear up for a potential US rate increase at either its November or December meetings. Recent narrative from a number of US Federal Reserve policymakers has seen the prospect of a move ratcheted up in the past few weeks, but whatever these policymakers say publicly it’s unlikely that the Fed would act in November due to the proximity of the US presidential election just over a week after their meeting.
A move in rates a week before such an important event would have the potential to be misinterpreted as political in nature, even if the motives appear benign. This is especially so since Donald Trump has been particularly vocal in his denunciation of the Fed’s actions over the past few years with respect to their low rate policy. These denunciations have included that Fed chief Janet Yellen is being political in trying to engineer the re-election of another Democrat president. There have also been unsubstantiated claims that some Fed governors have been contributors to Hillary Clinton’s presidential campaign.
While there is a significant amount of concern about the Fed’s accountability, there doesn’t appear to be much merit in these claims and as with anything in politics, perception is everything and mud sticks.
It is therefore significant that the movement in the US dollar will be a major factor in how well the pound does over the course of the next few weeks, and that’s before you even look to factor in the outlook for the UK economy, which coincidentally is outperforming the US economy. According to the latest IMF forecasts, for what they are worth, the UK economy looks set to be the best performing G7 economy this year, despite the so-called shock of the recent Brexit leave vote.
We also have the small matter of the new chancellor’s autumn statement, which is due towards the end of November and is likely to set out how the new government will deal with the UK economy in the aftermath of any new potential relationship with its European partners.
A Trump win in the US presidential election on 8 November would probably not be well received by the markets, and any short-term impact could well see the US dollar, as well as stock markets, slide sharply. It could also mean that any prospect of a US rate rise this year gets kicked out into the long grass. A Clinton win on the other hand could see the US dollar continuing to hold up well, in anticipation of a probable Fed rate rise at its December meeting.
Ultimately sterling’s direction of travel will be driven by perceptions of monetary policy on the part of both the Bank of England and the US Federal Reserve. In that context, UK prime minister Theresa May’s recent comment – that her government might have to look into the negative side effects of low rates and QE and at ways of changing it – could also feature in the equation. This could well limit the central banks’ ability to ease policy further if the UK government chooses to change the mandate.
In essence, any move on interest-rate policy is likely to be dictated by data coming from both the US and UK economy, and while data in the UK has been improving since the summer vote, the recent declines in the exchange rate certainly haven’t reflected that. If the data continues to improve, the ability of the Bank of England to cut rates further will become much more limited, which could well prevent further downside in the pound in the short term.
If markets have to absorb a Trump win then we may see a sharp sterling rally. The US dollar could get clobbered, as people concerned about a Trump presidency price out the prospect of a future rate hike and price in a period of significant uncertainty.
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