Trading opportunities: prepare for market volatility during US election

As the 2024 US election approaches, market participants are bracing for increased volatility that could present unique trading opportunities. With a highly polarized political landscape and a range of pivotal issues at stake, the financial markets are likely to react sharply to developments in the electoral process.

Traders and investors should prepare for fluctuations driven by polling data, candidate debates, and policy announcements, all of which can significantly impact market sentiment. In this article, we will explore strategies to navigate this unpredictable environment and capitalize on the potential opportunities that arise during this crucial election period.

US Presidential Election Uncertainty May Stir Stock Market Volatility

Equity markets have moved higher over the past couple months, with decent economic and inflation news as the tailwinds. But if history is any guide, the few weeks before a U.S. presidential election often sees a spike in volatility due to uncertainty, amongst other things.

So far, the markets appear quite calm regarding this election. In previous years, comments made during campaigns often led to increased intraday volatility as election day approached, but this year, there seems to be little concern over those remarks. While this may change as the election nears, the current market sentiment is notably stable. The chart above displays the VIX, which measures options volatility in the U.S. market, reflecting the 20 trading sessions before and after recent presidential elections.

In contrast to equity markets, which seem unfazed by election uncertainties, currency markets are responding differently. Volatility in currency options pricing has increased, along with a strengthening U.S. dollar. This could be due to hedging strategies or capital flows back to the U.S., contributing to a stronger dollar that might see a reversal post-election.

US election’s impact on forex market

If Donald Trump returns to the White House, many anticipate his policies will introduce volatility into the currency market. His inclination toward higher tariffs and a protectionist approach could strengthen the U.S. dollar. As tariffs rise, U.S. trade partners might experience economic slowdowns, leading to increased capital inflows into the dollar as a safer asset. Historically, Trump's presidency saw a stronger dollar, particularly in response to his aggressive trade policies and geopolitical tensions, which tend to attract risk-averse investors. If these trends repeat during a second Trump administration, key forex pairs like EUR/USD could decline.

On the other hand, a victory for Kamala Harris would likely mean a continuation of President Biden's policies, potentially limiting the dollar's upward momentum. Harris’ more conciliatory trade stance and moderate fiscal expansion could result in a weaker dollar, as markets may anticipate less volatility compared to a Trump presidency. Furthermore, a Harris administration might prioritize domestic economic stability over aggressive foreign policies, reducing the chances for the dollar to rally on geopolitical risks, which could allow forex pairs like GBP/USD to appreciate.

Regardless of the election outcome, investors should brace for potential currency fluctuations. A contested election could also create uncertainty in the markets. Thus, the lead-up to the election presents both risks and opportunities for traders focused on the USD and the broader forex landscape.

Will Oil and Precious Metals Shift?

As we approach November 5, not only the world's reserve currency but also various commodities may face volatility. Oil and precious metals like gold (XAU), silver (XAG), and palladium (PA) are expected to see significant price fluctuations leading up to the 2024 election.

For oil (CL), geopolitical tensions, particularly between Israel and Iran, are already influencing prices. Any escalation could restrict supply through key routes like the Strait of Hormuz, potentially driving prices higher. A spike in oil prices could lead to increased gasoline costs, affecting consumer sentiment and possibly lowering public approval of Vice President Kamala Harris if voters associate the hikes with her administration. However, some analysts believe that unless prices rise sharply, the impact may be muted, given the recent decline in gas prices.

Precious metals typically attract cautious investors during uncertain times, and the upcoming election season appears no different. Gold has hit historic highs this year, spurred by inflation worries and geopolitical instability. Investors often gravitate toward gold and silver when uncertainty looms, and any shifts in U.S. fiscal or monetary policy post-election could further boost demand. Inflationary pressures, particularly if government spending increases under a Harris administration, might also drive precious metals prices up, providing a safe haven for risk-averse investors.

Conclusion

In summary, the 2024 U.S. presidential election will significantly influence currency and commodities markets. Traders should brace for volatility in the U.S. dollar, oil, and precious metals, driven by geopolitical events, economic policies, and market sentiment as the election nears. Regardless of how prices fluctuate, the resulting market dynamics are bound to be intriguing.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.