USD: Trump trades being unwound after latest polls - ING

US election week is starting with a weak dollar across the board. Markets are still digesting the very soft payrolls numbers on Friday, which were highly affected by extreme weather events. Meanwhile, the latest polls suggest that the Democrats have regained some momentum in some swing states may have prompted some unwinding of Trump trades. Incidentally, a recent poll suggests that Kamala Harris is leading in Iowa, previously considered a red-leaning state, ING's FX analyst Francesco Pesole notes.

US elections and upcoming Fed meeting to shape the market

"Despite some unwinding of Trump trades, asset markets are still broadly pricing in a Trump win. As things stand now, we expect the dollar to sell off if Harris wins, while the impact of a Trump win may depend more on the Congress composition. A Republican clean sweep can send the dollar higher, but probably by less than how much a Harris win could hit USD. The USD might not rally at all if Trump wins but Democrats secure the house."

"Another big event this week is the Federal Reserve's rate announcement on Wednesday. By then, the election results may have not been called yet, meaning the FOMC market impact could prove rather short-lived. The Fed should cut by 25bp regardless of the US election result. Had it not been for the proximity of the vote, we would have argued a Fed cut would have been net-negative for the dollar, but the implications for FX of this Fed decision will only be assessed once the election volatility has dimmed down."

"Expect volatility in USD crosses today and tomorrow as FX liquidity may tighten and large hedging positions may be re-assessed on the back of latest sentiment on the vote. Today's momentum seems to be pointing to a weaker dollar, but things can turn rapidly in intraday trading. We retain a bias for a stronger USD today and tomorrow from this morning levels."