Politics will surely be driving exchange rates now that the US mid-term elections are over, and Exness traders are already preparing for a wild ride. The US elections are often characterised as a possible ‘reset’ moment for the US dollar. The general consensus is that USD will begin to weaken now that Democrats have taken control of the House of Representatives and shattered the Republican majority.
A YouGov poll forecasted Democrats winning 47% of the vote and Republicans 42%, which was an excellent indicator for traders to expect a bumpy ride for the US dollar. The numbers are in, YouGov called it right, and those traders following the forecast are hitting the "sell" button as you read this.
An imbalance in cuts threatens USD stability
The loss of Republican control of Congress will create more uncertainty, weakening the greenback in the coming days and weeks. More concretely, a now divided Congress will make it more difficult for the government to pass the massive spending cuts it has proposed for the 2019 budget. A budget that is relying heavily on the spending cuts to balance out Trump's generous tax cuts.
Big cuts to government spending that support the poorest and most needy in society are needed to pay for the loss of revenue from Trump's tax reforms. These have injected a 'sugar rush' high into the US economy, accelerating growth and supporting the US dollar.
The Democrat majority will prevent most of the cuts from seeing the light of day, and the US government will be forced to borrow more to meet its commitments. This will cause a rise in the US budget deficit which will weigh on the US dollar in the global markets.
Apart from that, the government needs the support of Congress to lift the US debt ceiling, which is likely to be hit—some analysts say as soon as mid-November. The risk of democrats causing a prolonged stand-off and delaying a raise to the debt ceiling is a very real financial stability risk for the US government and the dollar.
How to take advantage of the election
From a forex trader's perspective, a sure-to-be-popular way to trade on the Democrat victory could be to sell the USD against a counterpart. One risky/high-performance trade would be to buy GBP/USD as the pound continues to soar higher on current Brexit hopes. Be warned, while this might offer a highly profitable trade, we know from experience that these hopes can evaporate pretty quickly, and a trailing stop is recommended.
A less risky play would be to short the US dollar against a safe-haven currency such as the Swiss franc (CHF) or yen (JPY). Fears about US financial stability and a widening deficit may support safe-haven flows boosting these currencies. One trade we have already mentioned on the Exness news blog is the USDJPY short. Many traders will be placing a sell stop order on USDJPY. If everything goes as expected, the gains will be quite significant by the month end.
As for GBPUSD, the way to trade a fast-moving bull market is to wait for pull-backs into the 'buy-zone' between the 10 and 20-moving averages and then for a bullish bar to form (circled below) indicating a resumption of the uptrend. An example of such a set-up is below.
You can use charts as small as 5mins or as large as a month to look for set-ups such as these, which allow you to hitch a ride with a rising trend. A break below the 0.9940 lows on USDCHF meanwhile would be a very bearish sign for that pair and probably suggest a change of the short-term trend, lowering to a target at 0.9850.
The economic calendar is peppered with events and news releases that cause massive short-term volatility and equally impressive gains for traders who read the event correctly. If you want to start taking advantage of such trading opportunities, sign up with Exness today and start riding the midterm madness that some USD traders have been waiting for all summer.