With the US election on the horizon, uncertainty looms over key markets like USD/JPY, gold, and crude oil. Discover how potential political outcomes could trigger explosive volatility and reshape trading strategies in the days ahead.
By :David Scutt, Market Analyst
- USD/JPY, gold, and crude oil expected to see heightened volatility around US election results
- Policy differences between Democrats and Republicans on energy, trade, and fiscal policy are key market drivers
- A Republican “red wave” could boost USD/JPY, while a split Congress may pressure the pair lower
- Crude oil price outlook hinges on US dollar moves and potential shifts in energy and policy
- Risk of kneejerk selling in gold under red or blue sweep of Congress
Overview
USD/JPY, gold, and crude oil are poised for potential extreme volatility around the US election. This stems from the stark differences in energy, trade, foreign relations, and fiscal policies between Democrats and Republicans, as well as the uncertainty over whether either party can take full control of Congress, which could impact the implementation of their policy agenda.
This note focuses on possible market reactions to scenarios likely to trigger big market moves, helping traders align those outcomes with key technical levels.
USD/JPY: Red or blue waves amplify volatility risk
As a market that’s been strongly correlated with the US interest rate outlook for several years, USD/JPY screens as one of the easier FX pairs to assess how it may react.
As outlined in the USD/JPY election primer released over the weekend, here are the outcomes that could get USD/JPY moving:
Republican red wave (Trump victory, Senate/House Republican-controlled): USD/JPY likely rallies as the Treasury curve steepens, given the higher chance of expansionary fiscal policy.
Democrat blue wave (Harris victory, Senate/House Democrat-controlled): USD/JPY upside, but not as strong as a Republican sweep given pre-election policy signals.
Trump victory, split Congress: Policy gridlock could slow growth, weaken inflation, and increase chances of more Fed easing. Treasury yields are likely to fall, pulling USD/JPY lower.
Harris victory, split Congress: Most bearish outcome for USD/JPY given likelihood of sizeable falls in US Treasury yields.
Source: TradingView
USD/JPY has entered consolidation mode on the weekly chart after breaking several key technical resistance levels, although it’s notable that momentum remains with the bulls with RSI (14) and MACD continuing to trend higher.
You can see how influential 151.95 remains for USD/JPY with the price now finding support there after being capped below it for so long previously. 150.90 and the 50-week moving average are other key support levels nearby.
In a scenario of a Republican red wave, there is a meaningful risk USD/JPY could retest the multi-decade highs around 162 given the likelihood that higher US Treasury yields may draw capital into the US dollar. Even a Democratic blue wave could deliver upside given expansionary fiscal policy may fuel stronger growth in an already robust US economy, reducing the need for the Federal Reserve to cut interest rates further.
A split congress may see USD/JPY downside materialise, even with Trump as President, limiting the ability to introduce both tax cuts AND tariffs given he’ll need Congressional approval to push through the former. But, even then, downside may be limited to the high 140s considering momentum the US economy is carrying.
Click the website link below to get our exclusive Guide to USD/JPY trading in Q4 2024.
https://www.cityindex.com/en-au/market-outlooks-2024/Q4-usd-jpy-outlook/
Trump sweep bearish for crude prices
Crude oil is another market that’s interesting ahead of the election, not only because of the domestic US energy policy considerations but also the US dollar impact.
Even though Trump is an oil enthusiast, telling a rally in Detroit in October that "we will frack, frack, frack and drill, baby, drill,” the prospect of a Red wave screens as bearish considering the prospect of increased supply and dollar strength does not bode well for prices.
Some may argue that given his track record during his first Presidential term, Trump may attempt a quick solution to de-escalate tensions in the Middle East, further reducing the geopolitical risk premium built into the crude price.
Other election scenarios screen as far more neutral for the crude price, although a split congress could provide modest upside given the likelihood of a softer US dollar.
Source: TradingView
For the volatility seen in the WTI crude price recently, the weekly chart does a good job cutting through the noise to provide a stronger signal.
The price continues to coil in a triangle patten dating back many years, with dips continuing to be bought towards and marginally below $66 per barrel. On the topside, downtrend resistance dating back to September 2023 continues to thwart bullish breakout attempts, sitting this week around $79 per barrel.
In between, $72 has acted as a pivot level recently, often tested but rarely broken. The 200-week moving average is another level to keep on the radar, acting as a reliable location to buy dips below for several years prior to price breaking and closing below it July. Will it now act as a reliable level to sell? It hasn’t been tested since, but it’s worth monitoring.
Gold’s resilience to higher USD, rates put to the test
Gold has been largely immune to US dollar strength and higher US interest rates over recent years, deviating substantially from the trend seen for large periods prior to the pandemic. It looks nothing but bullish on the weekly timeframe with price and momentum indicators continuing to trend higher.
Source: TradingView
There’s no one election scenario that looms as particularly bearish for the gold price over the longer-term, even though a red wave is likely to spark dollar strength and higher US interest rates. If that were to take place we could see kneejerk selling, especially if accompanied by extreme volatility in other asset classes that could prompt liquidations to cover losses elsewhere. A Democratic blue wave could also spark near-term downside, although likely less than a Republican sweep.
A split Congress should be deemed a continuation of the status quo, putting the emphasis back on other factors including price action.
– Written by David Scutt
Follow David on Twitter @scutty
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.