The Trump trade retreat amid multiple polls showing Kamala Harris’s advantage has dealt a more significant blow to the US dollar than the US labor market report. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Highlights and key points
- The polls show Kamala Harris leading.
- The unwinding of US dollar positions led to a gap in the EURUSD.
- The Fed may put the rate cut cycle on pause.
- The euro may rise to $1.1 or fall to $1.07 after the election day.
Weekly US dollar fundamental forecast
Investors lacked confidence in the October US labor market report but were significantly influenced by the polls on the presidential race. Following a modest 12k employment expansion, the EURUSD pair gapped up at the start of the week. Kamala Harris, a candidate many had considered a frontrunner, exceeded expectations. Her potential victory has prompted US dollar bulls to shift their focus elsewhere.
As the election day drew closer, US Treasury bond yields rose, and speculators’ appetite for buying the greenback increased. In the week to October 29, hedge funds and asset managers increased their net bullish positions on the US dollar against major world currencies by $8 billion to $17.8 billion. The market was overconfident about Donald Trump’s imminent victory, and this proved to be a costly mistake.
Speculative positions on US dollar
Source: Bloomberg.
The ABC News and Ipsos poll revealed that Kamala Harris has a 49% lead compared to the 46% nationwide average. A New York Times/Siena poll indicated that the Democratic candidate was in the lead over her opponent in five of the seven swing states. The Des Moines Register poll presented a significant and unexpected result. Donald Trump was projected to lose the Iowa vote, a state that had consistently supported him in both the 2016 and 2020 elections.
As anticipated, the Trump trade began to retreat, with the EURUSD marking a gap at the opening of the week. It is anticipated that Trump’s return to the White House will bolster the US dollar due to the potential for accelerated inflation resulting from protectionist policies and significant fiscal stimulus.
Furthermore, Donald Trump made an error in judgment. The former US President stated that the October jobs report was a disaster, illustrating the significant negative impact of Kamala Harris’ policies on the US economy. Notably, the 12k increase in the indicator resulted from the effects of hurricanes and strike actions. The events are temporary, so investors showed no reaction to the weakest numbers since 2020.
In addition, the figures had little impact on expectations of the extent of monetary expansion. The derivatives market expects a 44 bps cut in the federal funds rate by the end of 2024 and a 57 bps cut by the end of January. This suggests growing risks of a pause in the cycle.
Market expectations on Fed interest rate
Source: Bloomberg.
These projections appear to be well-founded. The Federal Reserve is uncertain about the appropriate neutral rate, the US economy remains robust, and the new administration’s policies will likely influence inflation.
Weekly EURUSD trading plan
The market is likely bracing for a scenario in which Kamala Harris emerges victorious. If so, the EURUSD pair will surge above 1.1, driven by the retreat of the Trump trade. Conversely, the euro is likely to decline to 1.07. Against this backdrop, traders take a cautious approach, refraining from opening trades.
Price chart of EURUSD in real time mode
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