The Impact of the US Election on Fiscal Policy

The Potential Outcomes

As the US election approaches, the potential outcomes could have significant implications for fiscal policy in the country. Rabobank’s Senior FX Strategist, Jane Foley, highlights two scenarios:

  • Trump Victory: A Trump win is expected to lead to an extension of the US’s large budget deficit, with the Fed’s rate cutting cycle potentially ending by January. This could result in a stronger outlook for the USD in the coming year, especially if accompanied by a red wave in Congress. However, the long-term impact of trade tariffs on growth and inflation remains a concern.
  • Harris Victory: On the other hand, a Harris victory may also increase the US budget deficit, but a divided Congress could limit fiscal policy changes. This scenario could keep the Fed’s rate cutting cycle on track, potentially leading to a near-term selloff in the USD. The outlook for 2026 is less certain under a Harris presidency.

Implications for Currency Trading

Following the US election results, Rabobank will reassess its USD forecasts. Regardless of the outcome, there are specific currency pairs that investors may consider:

  • Buying AUD/NZD: Regardless of the election results, Rabobank continues to favor buying AUD/NZD on dips.
  • GBP/AUD Upside: A less dovish stance from Bailey on November 7 could lead to potential upside for GBP/AUD.
  • EUR Outlook: The Eurozone’s focus on fiscal prudence may reduce inflationary pressures for the ECB, potentially creating upside potential for AUD/EUR towards 0.62, assuming risk appetite remains stable.

Thorough Analysis of the US Election Results

The US election outcomes will have a significant impact on fiscal policy, with implications for currency markets and global economic trends. Here’s a breakdown of the key points:

1. Fiscal Policy Changes:

Depending on the election results, the US budget deficit could either increase or stabilize. A Trump victory may lead to a stronger USD outlook in the short term, while a Harris win could result in a selloff. The role of Congress in shaping fiscal policy cannot be underestimated.

2. Fed’s Rate Cutting Cycle:

The Fed’s rate cutting cycle may come to an end sooner under a Trump presidency, potentially impacting interest rates and currency valuations. A divided Congress could influence the Fed’s decisions, leading to a more stable rate environment under a Harris administration.

3. Currency Trading Opportunities:

Investors should closely monitor currency pairs like AUD/NZD, GBP/AUD, and AUD/EUR for potential trading opportunities post-election. The market reactions to the election results will provide valuable insights into the future direction of these pairs.

Overall, the US election results will shape the economic landscape in the coming years, impacting not just the USD but also global currencies and financial markets. Investors should stay informed and adapt their strategies accordingly to navigate these uncertain times.

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