Trading On The US Election

The 2020 US Presidential election will significantly impact the foreign exchange and stock market, affecting the relative strength of the US Dollar. Election-driven market movements have historically increased trading volatility, due to uncertainty in the marketplace. Find out what to consider when trading on the US presidential election.

Forex.com are operating a live blog from 7pm on election night, visit them here: FOREX.com

When Is The US Presidential Election?

On Tuesday 3rd November, the US Presidential vote will span 6 different time zones with the first exit polls available around 11pm EST. The winner, either sitting Republican President Donald Trump or Democratic nominee Joe Biden, will be inaugurated on Wednesday 20th January 2021.

What Markets Will Be Impacted?

The run-up to the election may open certain trading opportunities, with expected movements across currency pairs, indices, and commodities. Such volatility is also likely to continue until January 2021 and beyond.

  • Forex – EUR/USD, USD/JPY, GBP/USD, and other popular USD crosses are likely to be affected by the upcoming foreign policies of the winner
  • Stocks & Indices – The S&P 500, Dow Jones, and other US equities will be affected by the winner’s approach to international trade
  • Commodities – Oil, gold, and other major commodities will see price changes in line with the winner’s economic plans over the next 4 years

We explore this topic in more depth here: US Elections – Impact On Asset Prices

What To Expect

Pre-Election

A Trump win might see a decline in the US Dollar as he has typically favoured a weaker USD in order to make exports more competitive. On the other hand, tax cuts and deregulation may continue, which would in turn boost the US economy.

A Biden win might ease tensions in the trade war and boost the US Dollar in turn. On the other hand, there could also be tax increases and more limited deregulation policies.

However, it’s important to consider that we are living in unusual times, where COVID-19 has severely impacted economic activity. The US alone has suffered over 9 million cases and over 220,000 deaths, as of October 2020. A further spike in cases could see US indices and the US Dollar decline while a reduction in cases could have the opposite effect.

Post-Election

Brokers and financial institutions have considered the Presidential Election Cycle Theory, which attempts to predict stock market trends, based on the four-year presidential cycle. Equities have historically seen a weak performance in the first year of the presidential term. Performance then gradually increases over the next three years, with the strongest performance seen in the fourth year. Explanations for this range from positive policy changes to diminishing uncertainty over the term, though there are other factors to consider such as the political party in office at the time.

According to research cited by Oanda, the US Dollar has historically appreciated in value during the term of a Democratic president but has depreciated over the term of a Republican president.

This is likely due to the impact of economic policies introduced by the administrations, such as high-growth, GDP-boosting policies by Democratic Presidents (which boost the USD), and low-inflation, pro-business policies by Republican Presidents (which cause a decline in USD).

Preparing For Trading On The US Presidential Election

Traders should monitor volatility increases with USD forex crosses, US stocks and indices, and commodities such as oil and gold. Traders should also consider hedging their risk during the election. Top brokers such as IG offer assets on the weekend, meaning you can offset your risk during periods of high volatility.

CMC Markets provide several tips for political trading, including going long on positions where you expect a rise in prices, or going short where they will fall. You could also research hedging your trading portfolio and USD exposure, as well as using risk management tools such as guaranteed stop-losses, staying up-to-date with economic announcements, or setting price alerts on your mobile phone.

Top brokers are considering what sectors of the stock market may be affected. In the technology sector, for example, both candidates have expressed their concerns around tech giants, with Biden suggesting higher taxes on these companies. With a resulting plummet in share prices, traders should look out for companies such as Amazon and Apple. Similar effects could also occur within the healthcare and energy sectors, as explained by CMC Markets.

Final Word

Ultimately, the uncertainty of an election’s outcome makes it difficult to predict what traders and investors will do and how the markets will react. Furthermore, whilst past elections can certainly act as an indicator of what may happen next, traders should be aware of the economic impact that COVID-19 has had thus far, and the impact it may continue to have in the coming months.

The best course of action is to keep an eye on the markets and employ risk management tools in your trading platform. Also stay up-to-date with pre and post-election updates via financial news outlets, as well as analysis and insights on your broker’s platform.

FAQ

When is the 2020 US presidential election? 

The US presidential election is on Tuesday 3rd November 2020. The first exit polls will be available around 11pm EST.

Who are the 2020 US presidential election candidates?

The Republican presidential candidate is Donald Trump, the current sitting president. The Democratic nominee is Joe Biden, Vice President under the Obama administration.

Which financial markets will be impacted by the US presidential election?

The forex and stock markets will be seriously impacted by the result of the 2020 US presidential election. The strength of the US Dollar and confidence in the US stock markets will vary depending on who wins and the policies introduced.

How can I prepare for trading on the US 2020 presidential election?

With serious market volatility expected, it’s important to hedge your risk across trading positions. Risk management alerts and tools should play an important part in your strategy.

Where can I trade on the 2020 US presidential election?

Trading on the financial markets impacted by the US presidential election can be done at many top online brokers. Choose a provider that offers powerful trading tools, competitive fees and a breadth of products.