FOMC could boost the Dollar and Elections Spook the Markets

FOMC could boost the Dollar and Elections Spook the Markets
by, Staff, Bullish University

The Forex markets are likely to ignore a quiet European trading session and calendar only to focus on today’s Federal Reserve rate decision due out later this afternoon in the US trading session. A change in monetary policy looks unlikely this month, but investors will be looking to the post decision remarks by Chair Janet Yellen to see if a rate hike is on tap for December.

As it stands right now, there is a 7 in 10 chance they Federal Reserve will hike rates 25 basis points in December. This matches the past Fed rhetoric and should boost the US Dollar today which fell, yesterday, on election news out of the United States.

This morning, the anti-risk yen outperformed while the sentiment linked currencies, the Australian and Canadian Dollars moved lower on risk appetite. Regional shares, in the Asian and Pacific Rim moved lower by better than one percent. The New Zealand Dollar bucked the downtrend and moved higher on a solid labor market report.

Not since the Brexit vote in June have markets held this sense of wariness when it comes to important political votes. In less than one week, the United States will elect a new president in what has been an extremely contentious election between two very unlikable candidates. There has never been anything like this in recent history. There is a lot of anxiety surrounding this event and financial markets are reacting to any news. The previous session saw a selloff in assets after polls showed that Donald Trump was now in the lead, according to recent polling data.

Historically speaking, November is usually a good month for the S&P 500 as there is little volume and volatility. However, during election years, those statistics change. The CBOE VIX or “fear index,” has risen 6 days in a row and spiked up 10 percent yesterday. This moved the equity markets lower in the United States and this sentiment spilled over to Europe and into Asia this morning. In weeks that follow an election, there tends to be a consistency with uncertainty that leads to cool times, as volatility drops and markets return to normal trading patterns. However, sentiment usually does not follow into the equity markets, for the 12 months after an election, a University of Michigan sentiment survey shows a slide in stock prices.

In this particular election, or cycle, conditions are so different and inflamed, that traders should not rely on historical statistics. Especially when there is clear sentiment that one candidate can be potentially devastating to the economy. In this case it does not matter which party this candidate sits in. Right now, there is only fear and dissatisfaction for one half of the United States, regardless who wins. This is even worse for markets as we can see a more conviction less market trading consolidation emerge and the main stock bourses are all richly priced. Price action has yet to slip lower but this election could be the true contender for that spark that ignites the next market correction lower.

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