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When one party controls Congress and the White House, it is called a sweep and allows it to enact reforms quickly. In this regard, a Republican victory in the elections is good news for the dollar. Let’s discuss this topic and develop a trading plan for the dollar. Euro vs US Dollar.
USD Weekly Fundamental Forecast
Markets hate uncertainty. Politics has changed all the rules. The uncontested victory of Claudia Sheinbaum and her Morena party in Mexico has drained the peso. Conversely, the declining chances of an absolute majority in parliament for the National Rally have narrowed the yield spread between French and German bonds and sent the EUR/USD pair higher. Investors fear that the market will see unfavorable reforms if power is concentrated in the hands of one party. However, this is not the case in the US. A Republican sweep is seen as a strong argument in favor of a higher dollar index.
Bond yield differential between France and Germany
Source: Bloomberg.
Donald Trump’s uncontested victory and the Supreme Court ruling that he has immunity from prosecution for official acts as president have spurred Treasury yields and forced the EUR/USD pair lower.
The US dollar is king in the foreign exchange market as long as Joe Biden is in office, but that is due to the easy fiscal policy and monetary restraint of the Federal Reserve. However, everything will change in 2024. Excess household savings are depleted, the central bank is set to cut interest rates, and Democrats will struggle to pass new fiscal stimulus packages through Congress.
Conversely, if Donald Trump returns to the White House, a Republican victory would be fraught with an extension of the tax cut program and a widening budget deficit. More Treasury bond issuance would be needed to finance all of this, and the increased supply would push prices down and yields up. This is a tailwind for the EUR/USD bears.
Even another sign of a slowing US economy in the form of disappointing ISM manufacturing PMI statistics did not help the EUR/USD rally.
US Manufacturing PMI
Source: Bloomberg.
Add to that Donald Trump’s intention to raise import tariffs, which would accelerate inflation and force the Fed to keep interest rates at 5.5%, and the EUR/USD pair is in for a volatile ride. The slowdown in German consumer prices from 2.4% to 2.2% in June also increases the risk of the European Central Bank expanding its monetary policy twice in 2024, and political uncertainty persists in France.
In fact, the composition of the National Assembly will not become clear until the second round. The right-wing might get an absolute majority, which is seen as bad news for the euro. But the most likely scenario seems to be a minority government, which would eventually narrow the spread between French and German bond yields and allow the main currency pair to rise.
EUR/USD Weekly Trading Plan
Meanwhile, investors should take into account the upcoming release of important data on European inflation and the US labor market. Euro vs US Dollar A break below 1.07 could be a catalyst for a bearish revival and a selling impetus. As long as the euro is trading higher, the focus should remain on long positions.
EURUSD currency pair real time price chart
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