The 2024 election underscores the complex interplay of political events

Forex traders worldwide are always looking for volatility, whether to find a trading opportunity or consider it while building a trading strategy. Volatility can result from different reasons, but it is mainly a result of uncertainty. If the market is equally divided over a specific economic release or a political event such as the US elections, the uncertainty can be the main volatility driver. Every election has its circumstances and conditions. Depending on the extent of the election's impact, each currency pair reacts differently depending on its economic circumstances and relation to the US dollar. Understanding these economic conditions is crucial for informed and prepared trading strategies.

On election night in the US, traders follow the Associated Press and major news networks. As the votes are counted, sentiment changes depending on any change in expectations; for example, a previously Democrat county turns Republican, or a Democratic politician wins big in a Republican state. The shift in sentiment causes price action to fluctuate more aggressively than it would under normal circumstances.

The above image is a Daily chart for EUR/USD, the most traded currency pair in the world. It represents the Average True Range (ATR) readings as prices continued to fluctuate around elections. The chart compares historical volatility around the 2016, 2020, and 2024 elections on the daily timeframe. Each election had its circumstances and different economic and political environments within the US and globally.

In the 2016 US presidential elections, the Associated Press (AP) declared Donald Trump the winner on Wednesday morning, November 9th, 2016, at 2:29 AM EST late night of election day. Although the markets didn't have to wait long for the results, the volatility around the 2016 elections was mainly driven by the uncertainty about how Donald Trump would implement his campaign policies. Following the election results, the volatility continued to increase until its peak in January 2017.

In 2020, Joe Biden was declared the winner on Saturday morning, November 7th, 2020, four days after election day. The extended time was longer compared to previous elections. 2008, 2012, and 2016, the results were out between 11 PM EST election night and 1 AM EST the following day.

Although the delay extended the time of uncertainty and volatility rose well above its daily averages, it didn’t reach the peaks of 2016 as markets were getting out of the COVID era and different circumstances at the time. The US economy had low inflation ahead of the 2016 and 2020 elections, which is different from what we had in the 2024 elections. The volatility resulting from the 2024 elections was also influenced by the uncertainty around how central banks worldwide manage inflation. Central bank decisions, a key factor in market volatility, have been reflecting higher volatility and, in some cases, higher than the ones seen in elections.

In the 2024 elections, EUR/USD was the most impacted currency pair on election night, and in the days to follow, the currency pair dropped from 1.0920 down to 1.0380 in just under 3 weeks since the election results were announced. The decline in EUR/USD was mainly driven by the appreciation of the US dollar following Donald Trump's victory. If Trump’s policies are fully implemented, they will lead to further economic growth and possibly widen the budget deficit. Both are enough reasons to keep inflation elevated; therefore, the Federal Reserve will have to keep interest rates higher for longer, which keeps the dollar higher.

On the other hand, the Eurozone economy has been slowing down, job markets are showing weakness, and inflation has dropped below the central bank’s target of 2%. The change in the Eurozone economic data was another reason for traders to anticipate faster interest rate cuts by the European Central Bank (ECB). This anticipation, based on economic data, added more fuel to the decline in the EUR/USD exchange rate, highlighting the importance of data-driven decision-making in forex trading.

Although we saw significant price moves in the currency markets after the US election results were out, the volatility on election night was mainly subdued. It was clear early enough to many following the major news networks on election night that Donald Trump won. The spike and drop in volatility can be seen more clearly in the above 1-hour chart timeframe rather than the daily time frame, which was influenced by interest rate expectations rather than the election outcome.

As Donald Trump's victory became increasingly evident on election night, volatility began to tick higher by 8 PM EST and dropped by midnight, when Trump’s victory was in no doubt. As the election result uncertainty ended, volatility returned to its average levels.

Like its predecessors, the 2024 US presidential election was a significant event with the potential to trigger volatility in the forex market. However, the anticipated surge in volatility was less pronounced than in previous elections. Several factors contributed to this subdued volatility, including the relatively swift determination of the election outcome and the prevailing economic conditions.

While the election result did impact the EUR/USD exchange rate, the volatility on election night itself was short-lived. The more significant market movements were observed in the following weeks, driven by expectations about the new administration's future economic policies. However, it's important to note that these policies, coupled with the existing economic conditions in the Eurozone, played a more substantial role in shaping market dynamics than the immediate election result.

The 2024 election underscores the complex interplay of political events, economic factors, and market sentiment. While elections inherently carry the potential for volatility, their actual impact on the forex market is contingent on many factors. Understanding these factors, such as the prevailing economic conditions and the future economic policies of the new administration, is crucial for traders and investors navigating the complexities of the global financial landscape.