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The US dollar has recently gained strength as the US presidential election approaches. My analysis aligns with market sentiment, which has been influenced by the rising odds of a Republican victory, particularly for Donald Trump. UBS highlighted this in their October 16 note, pointing to media reports that suggest a better outlook for Trump in the latest polls. His potential policies, including more aggressive tariffs, are generally seen as supportive of the USD in the near term.
UBS analysts stated, “Higher odds of a Trump presidency are likely to be associated with a stronger USD near term.” This view is shaping market expectations, as investors anticipate a stronger dollar under a Trump administration.
Looking ahead, my expected USD range between September and December 2024 factors in the possibility of a meaningful rebound. However, like UBS, I foresee a modestly lower USD by year-end compared to current levels. Recently, I opted for a long AUD/USD call reverse knockout, but I’m not ready to implement a similar trade for EUR/USD or USD/JPY just yet. This is due to high JPY implied volatility and negative carry, which make long JPY positions less attractive so close to the US elections.
Turning to Europe, the upcoming ECB meeting is expected to deliver another 25bp rate cut, with market sentiment already pricing in the possibility of EUR weakness. UBS noted that risk reversal skews for EUR puts suggest that the market is preparing for further EUR softness. While market pricing aligns with my expectations of the ECB’s terminal rate, I believe EUR/USD remains more exposed to US developments, leaving me cautious about fading recent EUR softness based solely on ECB factors.
