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MENAFN- Daily Forex)
At the start of trading this week, the GBP/USD exchange rate rose to 1.2998 before settling around 1.2950 at the time of writing this analysis. This comes as financial markets react to the increased probability of Kamala Harris winning the presidential election today, Tuesday. The odds of Trump winning in the overall betting market are now around 57%, below the high-water mark of 65% seen on October 30.
Furthermore, the US dollar generally tracks these odds closely, rising when Trump's odds rise and falling when his odds fall. This speaks to the dollar-friendly policy mix proposed by Trump, which would include inflationary tariffs on imports. Several new polls released over the weekend were more favourable to Kamala Harris, with one even suggesting she would score a surprise win in Iowa.
The decline in the odds in Trump's betting market would better reflect the uncertainty in the polls, with the margin of error still pointing to a 50/50 tie. Analysts said,“Recent polls suggest Harris has gained ground in swing states at the same time that Trump's odds in the betting markets have continued to decline. Investors at Bull Market and Calci still see the former president as the front-runner. However, Predictit now has Harris winning the contest by a narrow margin,”.
Top Forex Brokers1 Get Started 74% of retail CFD accounts lose money Technical forecasts for the GBP/USD pair today:
Overall, we could have a result by Wednesday, and a Trump win is widely expected to boost the US dollar, while a Harris win would have the opposite effect. Moreover, some analysts believe that a Harris win could send the GBP/USD back to the 1.33 resistance. According to Credit Agricole Bank's forecast,“EUR/USD and GBP/USD could fall to their lowest levels in Q1 2024 or head lower in response to a Trump win accompanied by a 'red wave' in the US Congress. Conversely, they could be limited to 1.10 and 1.33 in the event of a Harris win and a divided US Congress.”
Analysts at TD Securities say that a second Trump presidency could spark a major rally for the US dollar. This would revive memories of US exceptionalism, fuelled by tariffs, tax cuts (on the red wave), deregulation and negative impacts on global growth prospects. Furthermore, a Harris presidency would therefore bring some weakness to the US dollar as the Trump risk premium unravels and the blue wave of the US dollar weakens.
For the pound, the big event locally this week is the Bank of England's decision on Thursday, when it is expected to cut interest rates by 25 basis points. The cut in sterling has been“in the price” for a long time and is unlikely to have an impact on the market. However, guidance on the possibility of another cut in December will be important.
If the Bank of England leans towards a second consecutive cut, the GBP/EUR rate will come under pressure. However, last week's budget reduced the likelihood of a December rate cut and the market is now pricing in a quarterly pace of UK rate cuts, which is relatively supportive of expectations. Sterling is therefore expected to react more clearly to any implied future guidance. Moreover, the correlation between foreign exchange yields and sterling has been broken since the budget and higher yields have not helped sterling. However, higher growth and inflation are expected to reduce the Bank of England's dovishness and support the currency.
EURUSD Chart by TradingView
The window of opportunity for the Bank to cut UK interest rates has opened up after last week's budget, where the government announced a large increase in spending that analysts say could give the economy a“strong boost” next year. Fiscal expansion is inflationary in nature, meaning the Bank will have to respond by keeping interest rates higher for longer. Indeed, the Office for Budget Responsibility raised its near-term growth and inflation forecasts after the Budget, and we will be watching the same for the Bank of England. Any upgrades to inflation and growth would therefore be a strong signal that the Bank of England acknowledges that it will have to maintain tighter monetary policy. Obviously, this would support sterling. Also, the biggest risk to sterling would be a scenario in which the Bank cuts interest rates and heads for another rate cut as early as December.
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