What currency pairs should I watch this U.S. election week?

Key points

• EUR/USD may weaken if Trump's protectionist measures strengthen the US dollar
• USD/JPY volatility expected as election outcomes impact yen performance
• USD/MXN could decline with potential tariffs on Mexican goods affecting trade
• USD/CAD sensitive to US election results with Canadian exports at risk
• GBP/USD influenced by US economic policy changes and interest rate expectations

As the US presidential election nears on November 5, financial markets are tense, anticipating potential shifts in US trade policy if there were to be a Trump presidency. Polls show a close race between Kamala Harris and Donald Trump. With the US Presidential election occurring this week, there is strong potential for several currency pairs turning volatile due to global market reactions to political developments. Monitoring these forex pairs can provide insights into market sentiment and economic forecasts affected by the US election outcomes. With that, here are some key pairs to consider:

1. EUR/USD - (Eurozone euro/US dollar)

Trump's proposed protectionist measures, including tariffs on European and Chinese imports, could strengthen the US dollar index and pressure the euro. Analysts suggest these tariffs, combined with domestic tax cuts, may create a hawkish dollar response, leading to a weaker euro due to policy rate divergences between the US and Eurozone. The Eurozone might face economic challenges, with retaliatory tariffs impacting exports and the ECB potentially pressured to lower rates further. A Trump win could thus lead to a prolonged euro decline against the dollar, affecting global currency markets, particularly those linked to commodities and emerging markets.

2. USD/JPY – (US dollar/Japanese yen)

The outcome of the 2024 US presidential election could significantly influence the performance of the Japanese yen against the US dollar. Historically, Democratic presidencies have led to yen weakness, while Republican administrations have seen the opposite. Despite this pattern, the yen's depreciation during Joe Biden's presidency has been largely attributed to the Federal Reserve's aggressive rate hikes and the Bank of Japan's loose monetary policy. As election uncertainty rises, global currency markets, including the yen, are experiencing increased volatility, with options pricing indicating heightened anticipation. Although Japan's central bank is expected to tighten its policy, supporting the yen, factors like US labor changes, global manufacturing shifts, and fiscal policies in Japan and the US add to the yen's uncertainty.

3. USD/MXN – (US dollar/Mexican peso)

As one of the United States’ neighboring countries, the Mexican peso could be significantly impacted by the outcome of the US election due to the potential for changes in trade policies, particularly if Donald Trump is elected. Trump's past administration was marked by a focus on protectionist trade measures, including imposing tariffs and renegotiating trade agreements like NAFTA into the USMCA. If there is a Trump victory, there is a possibility that he might reintroduce or expand tariffs on Mexican goods, such as vehicles, which could pose a substantial threat to Mexico's export-driven economy. Such tariffs would likely increase the cost of Mexican exports to the US, potentially reducing demand and impacting Mexico's trade balance. The prospect of heightened trade barriers could lead to a depreciation of the peso as investors react to the potential economic fallout. Additionally, the uncertainty surrounding the election might lead to increased market volatility, with the peso experiencing fluctuations based on investor sentiment and perceived risks to Mexico's economic stability and trading relationships. Overall, the election results could influence the peso through direct policy changes and the broader economic implications of the US's approach to international trade, impacting Mexico's economic outlook and currency valuation.

4. USD/CAD – (US dollar/Canadian dollar)

As the other major neighboring country to the US, the Canadian dollar, has dropped to a two-year low as of last week against the US dollar amid jitters ahead of the US presidential election. Analysts suggest that the election outcome could further influence the USD/CAD pair, especially with potential tariffs proposed by Donald Trump, which could affect US inflation and Federal Reserve policy. If the election results favor a government inclined towards protectionist measures, such as imposing tariffs on Canadian goods, Canada's export-heavy economy could suffer, given that about 75% of its exports head to the US. This could weaken the CAD, as trade barriers directly affect economic performance. Additionally, the inherent uncertainty of election outcomes often leads to increased market volatility, causing the CAD to fluctuate as investors react to potential policy changes. Should fiscal policies post-election drive US inflation higher, this could influence Fed interest rate decision expectations, potentially strengthening the US dollar and exerting downward pressure on the CAD. Moreover, Canada's economic outlook, which might benefit from lower borrowing costs, could be unsettled by election-induced volatility. Finally, as oil is a key Canadian export, any US policy changes affecting energy markets could indirectly impact the CAD by altering oil price dynamics. Thus, the election's repercussions on trade, interest rates, and market sentiment could play a pivotal role in determining the Canadian dollar's trajectory.

5. GBP/USD – (British pound/US dollar)

The British pound could be significantly impacted by the US presidential election through various channels. If the election results in notable shifts in the dollar, such as a weakening trend, the pound might strengthen relative to the USD; conversely, a stronger dollar could put downward pressure on the GBP. Furthermore, the election outcome could lead to changes in US trade and economic policies, potentially affecting global trade dynamics and, indirectly, the UK economy and its currency. Traders are also anticipating interest rate cuts from both the Federal Reserve and the Bank of England (BoE), with each expected to reduce rates by 25 basis points. The election's influence on US fed’s monetary policy expectations may also affect the pound through adjustments in yield differentials and capital flows. Overall investor sentiment, whether leaning towards risk or caution post-election, will additionally play a role, as investors might shift towards safe-haven assets, impacting currencies like the GBP. Thus, the pound's trajectory in response to the election will depend on these interconnected factors and their broader economic implications.

Each of these forex pairs post-election could be influenced by shifts in US trade policies, interest rate expectations, and overall economic sentiment resulting from the election outcome. Whether through protectionist measures impacting trade relations with Europe, Japan, Mexico, and Canada, or adjustments in monetary policy affecting the pound, the election's ripple effects could drive significant market movements. Traders can gain crucial insights into market sentiment and economic forecasts by observing these major currencies, as election-related developments unfold and impact global financial landscapes.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing. Past performance is not indicative of future results.