With less than two weeks until the US presidential election and the markets pricing in a higher likelihood of Joe Biden winning the upcoming elections, what would this mean for EURUSD – one of the most heavily traded currency pairs in the market? Here's the continuation of our 2020 US Election series as we explore how the EURUSD might fare with a Biden win.
According to a report published by UBS, the US election could affect the Eurozone economies via two key channels: trade and foreign policy.
In terms of trade, the US accounts for some 14% of all euro area exports, thereby making them one of the most important trading partners for the Eurozone.
The second channel is through its foreign policy. Currently, the less multilateral approach adopted by the US has heightened tensions with the Eurozone, while more bilateral trade with fewer tariffs under Biden’s presidency will likely have important ramifications for US-Europe relations and their respective economic progress.
Potential impact on USD
A Blue Wave scenario could add further downside pressure to the U.S. Dollar. According to Valentin Marinov, Head of G10 FX Research & Strategy at Crédit Agricole, “the USD has benefited significantly from President Trump’s policy mix of aggressive fiscal stimulus at home and trade protectionism abroad. This could come to an end if a Democratic president is elected.”.
Indeed, if the Democrat nominee Joe Biden emerges victorious, we could expect more favourable bilateral trade agreements along with less aggressive protectionist policies, especially against NATO allies in Europe which could promote more USD weakness.
Potential impact on EUR
In a Blue Wave scenario, US-Europe trade relations could improve, easing recent tensions formed as Trump imposed tariffs to a slew of EU products. This also means that we could be seeing a reversal in auto industry threats, along with steel and aluminium tariffs, as well as a more multilateral approach to global affairs – especially concerning NATO and the WTO and the issue of digital tax, which could provide some boost to the EUR.
While the EU could benefit from a friendlier trade relation with the US, the tax hikes and expansionary spending and social policy accompanied with Biden’s presidency could pose a challenge for Europe’s economy as well.
According to a report by CNBC, A Democratic sweep could “potentially pave the way for major tax hikes in the U.S. and excessive labor market regulations that may curtail U.S. trend growth and affect export-oriented Europe.”
Hence the policies proposed by Biden could hinder the US economic growth in the short run and result in negative spillover effects to Europe’s export-oriented economy.
This brings us to the conclusion of our second article. Do revisit the market analysis blog segment for further updates and newly published articles as we head closer toward this monumental event.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll