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The election race is quite tight and we do not know the result at the time of writing. The results in Georgia, Wisconsin, Michigan and Pennsylvania will be decisive and Biden probably just needs to win two of them to claim the victory. Investors sent EUR/USD lower, US yields lower and equity futures (in particular tech) higher, as investors have priced out the probability of a big, ambitious relief package being approved in early 2021, per Danske Bank.

Key quotes

“Scenario 1. In case of a clean sweep, the short-term focus will be on the handling of COVID-19 and short-term relief. In early 2021, we expect Congress to approve a big relief package (+$2,000 B). Further out (late 2021/early 2022) focus is likely to change to tax reform (higher taxes on corporates and high-income earners) and a bigger spending package (focus on infrastructure, green energy, health care, education, etc.). We do not expect major changes to monetary policy, as Joe Biden is expected to reappoint Fed Chair Jerome Powell as Fed Chair and the Federal Reserve has made it clear that it will not offset more expansionary fiscal policy by tightening monetary policy. The Fed funds rate will remain 0% for years and bond-buying will continue. On FX, we expect EUR/USD to move above 1.17, towards 1.20 on renewed market momentum for reflation trades.”

“Scenario 2. Biden wins the presidency but with a divided Congress. Short-term, that means that the gridlock may continue and, at best, we may only get a small relief package. Further out, it means that taxes on corporates and high-income earners will not increase and that there will be no major increase in federal spending on infrastructure, green energy, health care etc. On monetary policy, Joe Biden is expected to reappoint Fed Chair Jerome Powell as Fed Chair. As the probability of a very big relief package is slim, the Fed is expected to move in a more dovish direction increasing the bond-buying pace no later than at the December meeting. On FX, the EUR/USD range is set to shift lower to 1.15-1.18 from 1.15-1.20. Market focus to shift to global manufacturing, Brexit and COVID-19.”

“Scenario 3. Trump wins the presidency but with a divided/Democratic controlled Congress. In this scenario, the likelihood of a big relief package seems low. Trump will not be able to extend his 2017 tax cuts. On monetary policy, Trump is expected to re-appoint Fed Chair Jerome Powell as Fed Chair. As the probability of a massive relief package is slim, the Fed is expected to move in a more dovish direction increasing the bond buying pace no later than at the December meeting. On FX, the EUR/USD range is set to shift lower to 1.15-1.18 from 1.15-1.20. Market focus to shift to global manufacturing, Brexit and COVID-19.”