• High Volatility for USD: The FX market is pricing high volatility for the dollar, especially in USD/JPY, ahead of the close U.S. election, with other high-beta currencies also experiencing elevated volatility.
• Key Currencies at Risk: Markets expect greater volatility in pairs like EUR/USD, USD/CAD, and AUD/USD, reflecting concerns that a Trump win might increase tariffs impacting open economies like the eurozone and Canada.
• Election Impact on USD Outlook: A “Red Sweep” could push the dollar higher, while a Harris victory would likely weaken it, benefiting the euro, Canadian, and Australian dollars. A contested election or Trump without Congress could also lead to dollar weakness.
• EUR/USD Poised for Moves: EUR/USD gains could continue depending on election results, with the euro vulnerable to deeper ECB cuts if U.S. growth falters under a Trump second term without supportive tax cuts.
• GBP Under Pressure: GBP has softened due to U.S. election uncertainty, as close polling has spurred investors toward safer assets. A Trump win might further pressure GBP/USD below 1.30 due to inflation expectations and potential Fed tightening.

USD: Markets Bracing for Major Currency Moves as Election Nears

With a tight U.S. election at hand, the FX options market reflects an elevated sense of volatility, especially for the USD/JPY, which is seeing one-week volatility around 19%—a level last observed during significant market shake-ups in early August. Other high-beta currencies like NOK, AUD, NZD, and SEK are also showing increased volatility, highlighting global anticipation.

However, when comparing traded versus realized volatility, EUR/USD, USD/CAD, and AUD/USD stand out. For instance, EUR/USD’s one-week volatility is over twice its realized volatility, suggesting markets are hedging against potential economic impacts, especially if a Trump victory reignites tariff tensions that could hit open economies like the eurozone and Canada. The Canadian dollar, which fared well under Trump’s first term, faces greater uncertainty with concerns over the USMCA, as shown by USD/MXN volatility spiking to 45%.

With polls closing in key swing states early tomorrow CET, markets are likely to react immediately. Given the dollar’s recent strength in October, a “Red Sweep” could push it higher. Conversely, a Harris win may weaken the dollar, benefiting the euro, Canadian dollar, and Australian dollar. However, the markets might struggle with scenarios like a Trump win without the House or a contested election, which could lead to a weaker dollar if tariffs persist without tax cuts to counterbalance them.

Today, U.S. data releases include October’s ISM services, expected to dip slightly, and the Fed meeting, which could put further pressure on the dollar if it weren’t overshadowed by the election.

EUR: Hoping for Election Clarity

EUR/USD has maintained its recent gains, fueled by a combination of factors: hints from the ECB against a significant rate cut in December, soft U.S. jobs data, and favorable polling for Harris in Iowa. The FX market is prepared for a substantial move in EUR/USD, and with a decisive election outcome, new forecasts may emerge. However, a Trump win without the House could strain EUR/USD further by 2025, as U.S. growth could stagnate without fiscal support, pushing the ECB toward deeper cuts.

Though tonight’s European session ends before key ECB comments, any pushback against a 50bp cut in December may temper rate-cut expectations, currently priced at 29bp.

GBP: Sterling Slips Amid U.S. Election Uncertainty

The pound dipped against both the euro and dollar amid election-driven uncertainty in the U.S. With polls and betting odds too close to call, markets have turned to safer assets like the dollar, yen, and franc, while equities and riskier currencies like AUD have felt the weight of caution. GBP/EUR has softened from 1.1928 to around 1.1870 over the past day.

The final poll aggregate shows Harris with a slight edge, yet still within the margin of error, keeping the race in a statistical tie. Betting markets have seen Trump’s odds narrowing, reflecting the USD’s recent easing after a strong October.

Should early results favor Trump, GBP/USD may drop below 1.30, with steeper declines if he claims victory. According to Rabobank’s Jane Foley, a Trump win could boost the dollar given expectations for higher inflation and possible Fed rate tightening in response.