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.