Pound Sterling Dips as U.S. Election Uncertainty Boosts Safe-Haven Currencies

As Election Day unfolds in the U.S., the tight race makes it nearly impossible to predict a winner, with polling and betting markets showing an even split that leaves neither Donald Trump nor Kamala Harris as the clear favourite. This uncertainty influences financial markets, favouring 'safe haven' assets like the U.S. Dollar, Yen, and Swiss Franc, while putting pressure on stock markets and 'high beta' currencies such as the Australian Dollar.

Market uncertainty over the U.S. election outcome is likely to keep major financial moves in check until results begin to roll in tonight. Momentum has recently shifted in favour of Harris, with late-stage polling showing her gains and betting markets mirroring this trend. Financial market expectations often align with betting market indicators, contributing to recent softening in the Dollar.

If Harris performs well, further Dollar weakening is expected, with a more pronounced decline likely if she is declared the winner.

Markets Brace for Potential Deadlock in U.S. Election

There’s a possible scenario where the tight polling and betting market predictions lead to an election deadlock, similar to the contested 2000 race between George W. Bush and Al Gore, which was ultimately decided by the courts after an extended period of legal disputes and market uncertainty.

With Trump already alleging voter fraud, he appears prepared to challenge an inconclusive outcome, potentially prolonging uncertainty. Such a situation would likely boost the Dollar while pressuring risk-sensitive currencies. In this case, GBP/EUR could face additional strain, possibly pushing below the 1.19 mark.

Pound Sterling's Performance Hinges on BoE Rate Decisions and U.S. Election Outcome

In recent months, the Pound has been bolstered by expectations that the Bank of England (BoE) would move more cautiously on rate cuts compared to the Federal Reserve or the European Central Bank (ECB), resulting in higher UK lending rates. Currently, there’s a 93% probability that the BoE may implement a quarter-point rate cut this week, with a similar cut from the Fed widely anticipated based on overnight index swaps. However, weakening UK economic indicators and inflation aligning more closely with the G10 average—particularly services inflation now at 4.9%, falling short of the BoE’s 5.5% target—may influence the BoE's approach.

The combination of recent fiscal stimulus and potential market volatility from the U.S. election aftermath might lead the BoE to remain cautious about signalling future moves. Much also depends on upcoming UK inflation reports before the year's end.

Sterling’s near-term trajectory largely hinges on the U.S. election outcome, although seasonality might provide some support if a negative "Red sweep" scenario does not emerge. Historically, the third quarter has been the Pound's strongest, with an average 1.4% gain for GBP/USD over the past decade. However, with GBP/USD down over 3% quarter-to-date after its worst October since 2016, there is significant ground to recover.

USD Closes Week Steady Amid Reduced Trump Bets and Weakening Economic Data

The USD remained stable at the end of last week as investors scaled back their bets on a Trump presidency. Meanwhile, US economic data reflected a slowdown, with lower manufacturing output and reduced job growth contributing to the dollar's flat performance.  

Ahead of the US presidential election, traders are preparing for potential market swings, adjusting their positions and hedging against uncertainty. While some of these positions have unwound over the past week, recent polling data shows Kamala Harris gaining favour in swing states, as betting odds for a Trump win continue to decrease. EUR/USD opened the week stronger, rebounding from $1.0760 to $1.0880 at interbank (IB), reflecting the dip in Trump’s winning odds. The EUR, YEN, and GBP are expected to stay highly responsive to election developments.

The outcome of the US election will be a key factor for the GBP/USD pair in the near term. A Trump victory could drive the pair down toward $1.26 at IB, whereas a Harris presidency is likely to support it above the $1.30 level at IB.

British Pound Faces Selling Pressure Amid UK Budget Concerns and Imminent Rate Cut

The British pound has encountered selling pressure as investor sentiment soured over the latest UK budget. Additionally, anticipation of another interest rate cut by the Bank of England this week has weighed on the currency.  A 25 basis point interest rate cut is expected, the cut has long been 'in the price' of the Pound and is unlikely to sway the market. However, the guidance pertaining to the potential for another cut in December will be important.

BoJ Drives APAC Volatility

The greenback weakened over the past 24 hours, with the USD index falling to its lowest level since 22 October, following Thursday’s Bank of Japan decision which indicated the BoJ was less likely to raise rates than anticipated. The BoJ cited concerns about “market volatility” as a reason to maintain interest rates, resulting in the USD/JPY dropping 0.8% from three-month highs.

The US dollar weakened across most markets, with the EUR/USD rising 0.3%, USD/CHF falling 0.3%, and AUD/USD increasing 0.1%. However, the British pound weakened as markets continued to react to this week’s UK Budget, while the CAD fell after a speech by Bank of Canada Governor Tiff Macklem suggested the possibility of further local rate cuts.

Weak Hiring? US Jobs Due

All eyes are on today’s US jobs report and whether a significant miss or beat will affect Fed rate expectations and broader markets. With the US election just days away, traders might prefer to stay on the sidelines. The US dollar is slightly softer ahead of the risk event but is set to close October with around a 3% gain against a basket of major currencies, marking its strongest monthly rise in over two years.

US job growth is expected to slow from the recent uptick seen in September. The October figure is anticipated to be slightly above 100k, less than 50% of the previous 254k figure. Bloomberg Economics forecasts a negative -10k print due to the hiring slowdown related to the hurricane season.

The S&P purchasing manager indices exceeded expectations across the board. It is now up to the more significant ISM to show similar results. Consensus expects a slight improvement in October as regional Fed PMIs have recently painted a somewhat positive picture.

Sterling Still Whirling

The volatility in UK gilts and the British pound is far less severe than during the run-up and aftermath of the infamous 2022 mini-budget. However, the market reaction to the Labour Party’s Budget has still been quite negative.

The UK 10-year gilt yield surged above 4.51%, the highest in a year, while the fall in GBP/USD accelerated to $1.29. This kind of response from financial markets is not what a Chancellor wants to see after a budget, especially with numerous risk events looming in the near future.

The US election, Fed, and Bank of England decisions on interest rates next week all have the potential to exacerbate what is already a delicate situation for UK assets.

Greenback Dips as US GDP Underwhelms

The US dollar fell broadly on Wednesday following disappointing GDP figures for the September quarter, which came in below expectations. The US September-quarter GDP grew by 2.8% on an annual basis, missing the 3.0% forecast.

The USD saw its steepest declines in Asia-Pacific, despite an early drop in the Australian dollar after inflation in Australia for the same period slowed more quickly than anticipated. However, the Australian dollar later rebounded to close 0.5% higher.

Elsewhere, the EUR/USD gained, while USD/CAD retreated from recent highs. Meanwhile, the pound was unsettled following the UK’s Budget announcement on Tuesday.

Looking ahead, the Bank of Japan and China’s PMIs are key in Asian markets, while the US personal consumption and expenditure (PCE) index, a key US inflation measure, is due for release later.

UK Markets Volatile After Budget

Sterling traded erratically in response to the Labour government’s first Budget announcement. Although GBP/USD cut early losses, it remained below the $1.30 mark, despite traders reducing expectations for a rate cut from the Bank of England (BoE). The intraday swing between the high and low on the 10-year gilt yield was the second largest recorded this year.

UK Chancellor Rachel Reeves introduced £40 billion in tax increases, aimed at bolstering public services and addressing a £22 billion fiscal shortfall left by the previous government. Key measures include a 1.2% rise in employers' national insurance contributions and an increase in capital gains tax, marking the most tax-raising Budget in at least 50 years. However, major spending increases are also planned, leading some investors to adjust their expectations for BoE rate cuts, though a 25bps cut is still anticipated next week.

The pound remains choppy, weighed between fiscal and monetary dynamics and the risk premium tied to additional gilt issuance. While a slightly looser fiscal stance alongside tighter monetary policy should lend support to the pound, rising yields amid a depreciating currency indicate lingering market uncertainty and a lack of confidence in UK policy among investors.

China Manufacturing PMI in Focus

On the technical front, USD/CNY’s chart signals an uncertain outlook due to the whipsaw activity around the 7.06 inflection point, with the pair testing the 7.14–7.146 Fibonacci retracement range. For now, the next resistance levels are between 7.1804–7.1914, while key tactical support lies within 7.046 to 7.097.

As shown in the chart below, the key rate differential still supports an upward trend in USD/CNY, given the strong correlation. All eyes are now on the official manufacturing PMI. This index increased by only 1.2 percentage points to 54.5 in October, up from 53.3 in September, yet the Emerging Industries PMI (EPMI), a leading indicator, remains well below its historical October average of 59.7 for 2014–23.

Moreover, the consecutive monthly growth of 1.2 pp is considerably below the historical average increase of 4.8 pp. We anticipate the official manufacturing PMI will hold steady at 49.8 for October, unchanged from September’s reading.